Quarterly Management Discussion & Analysis (MDA310305.pdf)
Quarterly Management Discussion & Analysis (MDA310305.pdf)
Quarterly Management Discussion & Analysis (MDA310305.pdf)
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March 2005<strong>Management</strong> <strong>Discussion</strong> & <strong>Analysis</strong>
ContentsExecutive Summary 3<strong>Analysis</strong> of the Consolidated Performance 11- Net Interest Margin 12- Results from Doubtful Loans 13- Banking Service Fees 15- Non Interest Expenses, except for ISS, PIS and COFINS 16- Tax Expenses - ISS, PIS and COFINS 19Pro Forma Financial Statements 21Financial Statements per Segments 24Itaubanco - Banking 26Credit Cards - Account Holders 27Insurance, Pension Plans and Capitalization 28Investment Funds and Managed Portfolio 32Itaú BBA 33Itaucred 34Balance Sheet by Currency 37Risk <strong>Management</strong> 39Activities Abroad 45Ownership Structure 48Performance in the Stock Market 50Report of Independent Accountants 51We point out that the figures referring to prior periods, shown in this report, have been reclassified for comparison purposes, without causing an impacton net income.We point out that the pro forma data referring to prior periods, shown in this report, have been recomputed due to changes in the criteria applied tosegments..The effects of exchange variation on foreign investments are distributed in the Statement of Income according to the nature of the corresponding balancesheet accounts.The tables in this report have the numbers expressed in millions. However, variations and totals were calculated based on numbers expressed in whole units.Future expectations resulting from this analysis should take into consideration the risks and uncertainties surrounding any activity, and which are beyondthe control of the companies in the group (political and economic changes, volatility of interest and exchange rates, technological change, inflation,financial disintermediation, competitive pressures on products and prices, and changes in the tax legislation).
Executive SummaryFirst Quarter of 2005Net Income and Return on Equity1,1411,030949 920714 776 854 87680731.8 32.1 31.3 32.0 31.2 33.1 30.3 32.9 35.11stQ .03 2ndQ.03 3rdQ .03 4thQ .0 3 1stQ .04 2ndQ.04 3rdQ .04 4thQ .0 4 1stQ .05Net Interest Income1stQ.054thQ.043rdQ.042ndQ.041stQ.044thQ.033rdQ.032ndQ.031stQ.03Bank Service Fees1stQ.054thQ.043rdQ.042ndQ.041stQ.044thQ.033rdQ.032ndQ.031stQ.03Net Income (R$ Million)Return on Equity (%)Effect of nonrecurring itensEffect of nonrecurring itensNon Interest ExpensesR$ Million3,0613,012 612 3,6242,6732,4572,3732,6982,7082,5002,955R$ Million1,7941,7991,675 1241,5081,4541,4051,3431,3231,2441,212R$ Million1st q.04 2nd q.04 3rd q.04 4th q.04 1st q.05OrbitallItaucredEfficiency Ratio1st Q.054th Q.043rd Q.042nd Q.041st Q.04Efficiency Ratio (*)49.4%45.9%Efficiency Ratio - Without non recurring items (*)52.5%55.8%58.0%50.9%(*) The efficiency ratio calculation criteria are detailed on page 17.Banco Itaú Holding posted consolidated net income of R$ 1,141 millionin the first quarter of 2005, corresponding to an annualized return of35.1% on the R$ 14,629 balance of the parent company's equity. In thepast few quarters, the growth in loan transactions made the groupoperating profit increasingly robust, consistent and sustainable. Theimportance of such transactions to the consolidated result hassignificantly increased, thus ensuring the expansion of the financialmargin. Furthermore, net income for the quarter was impacted by thefull amortization of R$ 200 million (R$ 182 million after taxes) of thegoodwill arising from the partnership between Itaú and Lojas Americanas- LASA, as well as the increase in excess provisions for doubtful loans,amounting to R$ 150 million.As discussed in the previous report, in the fourth quarter of 2004 the netinterest income was impacted by R$ 612 million of non recurring items.In the absence of such items in the current quarter, our analysis willcompare the financial margin in the two periods excluding theaforementioned extraordinary impacts. In the first quarter of 2005, financialmargin grew by R$ 49 million compared to the previous period, primarilydue to the expanded volume of credits, whose contribution was anincrease of R$ 155 million. On the other hand, the financial margin wasreduced by R$ 106 million from treasury results and gap management. Itshould be pointed out that management of exchange exposure impacts(investments abroad) and related hedges are carried out after taxation.Banking Service Fees totaled R$ 1,794 million, decreasing by R$ 5 millioncompared to the previous quarter. The acquisitions of Orbitall andCredicard in the fourth quarter of 2004 significantly impacted revenuesfrom Credit Cards in the first quarter of 2005. Similarly, the increase in thevolume of transactions and the rise in rates effective December 2004 ledto a growth in Revenues from Current Accounts. Revenues from LoanTransactions also grew from the increased volume of retail installmenttransactions and vehicle financing. Finally, the 5.5% increase in thevolume of funds under management caused the expansion of revenuesfrom fund management. One should also bear in mind the recognitionin the fourth quarter of 2004 of R$ 124 million of collection servicesrendered to INSS, an extraordinary event which was absent in the firstquarter of 2005.Non interest expenses in the first quarter of 2005 totaled R$ 2,381 million,which corresponds to a reduction of R$ 99 million in relation to theprevious quarter. This fall is associated with a reduction in expenses relatedto marketing (seasonal), the introduction of an accounting practice thatnow fully depreciates assets with residual values below R$3,000.00 (in2004, it was only adopted in the fourth quarter) and the reduction in theexpenses with the setting up of operational provisions for contingentliabilities. The efficiency of Itaú's control over costs stands out more whenwe disregard the impact connected with the institution's new strategicventures. When this is done, the expenditure not derived from interest isR$ 1,947 million, which is practically equivalent to the same amount forthe first quarter of the previous year. Reflecting the strategic focus onthe control of costs, the Efficiency Ratio reached 49.4% in the first quarterof 2005. The new initiatives of the Itaú in direction to the segment ofcredit to the consumer should generate, in consequence, an expansionof the costs. However, we believe that in real terms, considering thesame bases, we will maintain the costs in an adequate level, permitingthe positive evolution of the efficiency ratio.4 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Executive SummaryFirst Quarter of 2005Credit Operations (*)R$ BillionMar-05 11.745.357.0Dec-04 11.641.753.3Sep-04 12.838.351.1Jun-04 13.735.048.7Mar-04 12.132.7 44.8Dec-03 12.232.3 44.5Sep-03 12.530.2 42.7Jun-03 13.431.2 44.6Mar-03 15.231.246.4Foreign CurrencyLocal Currency(*) Endorsements and Sureties includedDuring the quarter, Itaú continued to expand its consumer finance business on three fronts - direct consumer loans,vehicle financing and consigned credit. The total balance of the loan portfolio, including endorsements and sureties,grew by an impressive 7.0% in the period. Noteworthy was the growth in the private individual segment (+13.7%),reaching R$ 20,770 million at the end of the first quarter of 2005. In particular, the balance of personal credits improveddramatically, with a 22.2% rise on the previous quarter. Vehicle financing also posted a significant 17.3% increase in thequarter. In the corporate segment, the growth stood at 4.7%, while the portfolios of micro, small and medium businessesposted a 5.4% increase from the previous quarter. The large corporation segment also grew by 4.4% compared toDecember 2004.NPL Ratio (*) - Individuals x Businesses (%)8.9 8.5 8.3NPL Ratio - IndividualsNPL Ratio7.37.36.54.2 4.7 4.7 4.1 4.0 3.52.0 2.4 2.5 2.2 1.91.86.03.21.55.62.90.9NPL Ratio - Businesses(*) Nonperforming Loans: Loans overdue for more than 60 days.5.62.90.8Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05Loan and Securities PortfoliosR$ MillionThe nonperforming loan ratio was 2.9%, unaltered from the previousquarter, still reflecting the market conditions seen over the past fewmonths and, to a lesser extent, the impact of write-offs from the provisionfor doubtful accounts. We do not, however, expect this ratio to remain ata low level because of the strategy defined by Itaú that seeks to directresources towards operations with wider margins, determining a changein the mix of the credit portfolio and necessarily taking on greater risks inoperations more susceptible to the deterioration of the market. At thistime, we note that certain indicators point to a likely increase in provisionsin the future.Unrealized Result At March 31, 2005, unrealized profit/(loss) in Itaú's results totaled R$ 2,263R$ MillionMar-052,263million compared to R$ 2,371 as of December 31, 2004. Such reductiondec/042,371relates to the fall in quotations on stock exchanges and the increase insep/042,871the perception of the Brazil country risk, impacting the marking-to-marketJun-042,667of the Bank's portfolios. In the first quarter of 2005, Itaú increased theMar-042,915dec/032,677provision in excess of the minimum required to meet doubtful loans bysep/032,070R$ 150 million, totaling R$ 1,150 million, which is not included in unrealizedJun-03profit/(loss).Mar-031,8501,568Individuals 20,770 18,271 13.7%Businesses 31,891 30,467 4.7%Small businesses and middle market 9,037 8,571 5.4%Corporate 22,854 21,896 4.4%Restricted Loans 4,351 4,536 -4.1%Public Securities 7,218 7,486 -3.6%Private Securities 11,660 12,145 -4.0%DEVELOPMENT OF NEW SEGMENT - CONSUMER CREDIT - ITAUCREDBreakdown of Net Income for the 1stQuarter of 200522.3%10.6% 0.6%ItaubancoItaú BBAItaucredCorporation66.5%Over the past few quarters, Itaú has taken a number of steps to pursue thestrategic goal of developing new sources of income, which will help enhancethe institution's future sustainability. To enable our shareholders and marketanalysts to follow up the performance of these initiatives, we introduce inthis quarter the Itaucred Segment, which basically reflects transactions carriedout through channels intended for non-account holder customers.Accordingly, as from this quarter the following segments will be reviewed:ITAUBANCO: Banking Transactions, account holder Credit Cards, Fund<strong>Management</strong>, Insurance, Pension Plan and Capitalization transactions;ITAÚ BBA: Corporate Transactions;ITAUCRED: Transactions carried out through channels intended for nonaccountholder customers, comprising Taií, Vehicles and Credit Cards;CORPORATION.5 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Executive Summary - First Quarter of 2005Income by SegmentsSince 2004, a number of initiatives were launched with respect to the consumer credit segment, among whichwe highlight as follows:- Taií - Organic growth. Offers credit to the low-income population.- Partnership with CBD/LASA - Financing of the low-income population segment.- Vehicles - Fiat and Intercap - Financing marketed outside the branch network.- Credicard - Credit cards for non-account holders.- Consigned Credit - Loans tied to payroll.This posture relates to the opportunities envisaged in Brazil, which will likely provide the Bank with the requiredconditions for sustained growth, consistent with its operations. Significant investments were allocated to theseinitiatives (R$ 1,462 million arising from payment of goodwill) and, as mentioned above, a new segment (Itaucred)has been created, where the business performance will be disclosed.For comparison purposes, the segment performance in the fourth quarter will also be presented. The sections willinclude:ITAÚITAUBANCOITAÚ BBAITAUCREDCORPORATIONItaubancoItaubanco's net income for the first quarter of 2005 decreased of R$ 78 million compared to the fourth quarter of2004. Once again, our analysis will not take into account extraordinary impacts. The main changes were: (a)increase by R$ 213 million of the provisions for doubtful accounts, in particular R$ 132 million of excess provisionfor this segment, increased expenses due to the portfolio growth, as well as changes in customers' risk ratings; (b)increase of R$ 99 million of banking service fees, on account of the higher volume of transactions, as well as theimpact of revenues from credit transactions associated with the increased volume, in addition to the growth inthe balance of funds under management; (c) decrease of R$ 90 million of non interest expenses, primarily due tothe seasonality of marketing-related expenses, as well as the adoption of the accounting policy of fully depreciatinggoods whose net value is under R$ 3,000.00 (This policy was adopted only in the fourth quarter of 2004).Banco Itaú BBABanco Itaú BBA's financial margin declined by R$ 95 million quarter-on-quarter, as a result of the impacts offoreign exchange risk management of investments abroad, partly offset by the tax effect on hedging transactions,as well as the decreased gains from structured credit transactions and derivative instrument transactions. Thepositive change of R$ 36 million in the results from doubtful loans was due to a reversal of R$ 67 million of theprovision in the first quarter of 2005, chiefly arising from the renegotiation of previously written-off credits, in theamount of R$ 80 million. Non interest expenses declined by R$ 28 million quarter-on-quarter, influenced byoperating provisions recorded in the fourth quarter of 2004 but not in the first quarter of 2005. Income tax andsocial contribution expenses posted a 32.0% reduction from the previous quarter, primarily because of the taxeffect of the currency hedge derivative transactions for investments abroad.ItaucredItaucred's net income for the first quarter added up to R$ 123 million, an R$ 18 million rise on the previous quarter.The growth stems in part from the increased interest in Credicard Banco, which impacted the first three monthsof 2005, but only two months of the previous quarter. It should be stressed that the interest in Credicard significantlyenlarged Itaú's business prospects, since the shareholders' agreement provides for taking advantage of crosssellingopportunities to non-account holder customers, previously off-limits.CorporationThe results of the Corporation reflect the financial income of Itaú's excess capital. They were also impacted by theextraordinary profits for the periods, usually relating to the full amortization of the goodwill on acquisitions andassociations carried out by Itaú. In the first quarter of 2005, the Bank recorded extraordinary income of R$ 142million primarily relating to the amortization of the goodwill paid on the association of Itaú with Lojas Americanas- LASA.6 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Executive SummaryFirst Quarter of 2005The pro forma financial statements of Itaubanco, Itaú BBA and Itaucred shown below are based on managementinformation, reflecting more accurately the performance of the conglomerate's various business units. Betweenthe first quarter of 2005 and the last quarter of 2004, the following variations occurred in the income statement ofItaú's business segments:PRO FORMA STATEMENT OF INCOME PER SEGMENT1st Q.05Adjusted(a)4th Q.04Adjusted(b)R$ MillionNet Interest Income 2,044 - 2,044 2,635 612 2,023 21Result from Loan Losses (481) - (481) (257) - (257) (224)Banking Service Fees 1,543 - 1,543 1,568 124 1,444 99Non-Interest Expenses ² (1,955) - (1,955) (2,045) - (2,045) 90Income Tax and Social Contribution (344) - (344) (581) (250) (331) (13)Other ³ (40) - (40) 11 - 11 (52)767 846Net Interest Income 370 - 370 464 - 464 (95)Result from Loan Losses 67 - 67 31 - 31 36Banking Service Fees 80 - 80 84 - 84 (4)Non-Interest Expenses ² (130) - (130) (159) - (159) 28Income Tax and Social Contribution (103) - (103) (151) - (151) 49Other 4 (26) - (26) (27) - (27) 1257 242Net Interest Income 445 - 445 337 - 337 108Result from Loan Losses (120) - (120) (41) - (41) (79)Banking Service Fees 172 - 172 148 - 148 23Non-Interest Expenses ² (288) - (288) (273) - (273) (15)Income Tax and Social Contribution (56) - (56) (39) - (39) (17)Other 4 (30) - (30) (27) - (27) (3)123 105Net Interest Income 202 - 202 188 - 188 14Banking Service Fees (1) - (1) (1) - (1) 0Non-Interest Expenses ² (7) - (7) (5) - (5) (2)Income Tax and Social Contribution (33) - (33) (7) - (7) (26)Extraordinary Result (142) (142) (0) (794) (794) 0 (0)Other 4 (25) - (25) (29) - (29) 4135 1461,283 1,338(1) The adjustment refers to the exclusion of non recurring and extraordinary items.(2) Includes Personnel Expenses, Other Administrative Expenses, Tax Expenses - CPMF and Other Taxes and Other Operating Expenses.(3) Includes Revenues from Insurance, Pension Plan and Capitalization Transactions, Tax Expenses - ISS, PIS and COFINS, Equity in the Earnings of Associated Companies, Other Operating Income, NonOperating Profits, Profit Sharing, and Minority Interests in Subsidiary Companies.4) Includes Tax Expenses - ISS, PIS and COFINS, Equity in the Earnings of Associated Companies, Other Operating Income, Profit Sharing, and Minority Interests in Subsidiary Companies.7 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Executive SummaryConsolidated Balance SheetCash And Cash Equivalents 1,963 1,930 1,961 33 2Short-term Interbank Deposits 22,002 19,747 25,097 2,256 (3,094)Securities and Derivative Financial Instruments 29,750 29,176 28,801 575 949Interbank and Interbranch Accounts 11,932 10,878 9,362 1,054 2,569Loans, Leasing Operations and Other Credits 50,980 47,407 38,871 3,573 12,109(Allowance for Loan Losses) (3,288) (3,054) (3,103) (234) (185)Other Assets 30,065 21,135 22,758 8,930 7,308Foreign Exchange Portfolio 13,417 9,159 10,788 4,258 2,629Others 16,648 11,976 11,970 4,672 4,678Investments 842 920 962 (78) (120)Fixed Assets 1,926 1,965 2,029 (38) (102)Deferred Changes 230 234 242 (4) (12)Deposits 44,025 42,030 34,606 1,995 9,419Demand Deposits 10,669 11,156 8,798 (488) 1,871Saving Account 19,024 19,197 17,530 (174) 1,494Interbank Deposits 1,055 647 451 408 605Time Deposits 13,277 11,029 7,828 2,248 5,449Deposits Received under Securities Repurchase Agreements 17,367 16,098 21,396 1,269 (4,029)Funds from Acceptances and Issue of Securities 3,750 3,431 3,492 319 258Interbank and Interbranch Accounts 2,085 1,078 1,819 1,006 266Borrowings and On-lendings 10,229 10,518 13,525 (289) (3,296)Derivative Financial Instruments 2,243 1,173 858 1,070 1,385Technical Provisions for Insurance, Pension Plans and Cap. 11,554 11,023 8,320 531 3,234Other Liabilities 39,271 29,775 29,265 9,496 10,007Foreign Exchange Portfolio 13,567 9,405 10,873 4,162 2,694Subordinated Debt 4,770 4,765 4,855 5 (85)Others 20,934 15,605 13,537 5,330 7,397Deposits 44,025 42,030 34,606 1,995 9,419Assets under <strong>Management</strong> 105,197 99,753 87,060 5,444 18,137Total Deposits + Assets Under <strong>Management</strong> 149,222 141,783 121,666 7,439 27,5568 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Executive SummaryConsolidated Statement of IncomeR$ MillionLoans and leasing operations 3,135 2,268 2,339 868 796Securities 1,201 2,008 1,598 (807) (397)Financial Income of Insurance, Capitalization and Pension Plans 400 389 265 11 135Trade Finance and Foreign Exchange Portfolio 55 (92) 84 147 (29)Compulsory Deposits 216 174 160 42 57Deposits, Money Market and Interbank Funds (1,433) (1,156) (1,526) (277) 93Financial Expense of Insurance, Capitalization and Pension Plans (309) (281) (196) (28) (113)Borrowings, Assignments and On-lending (204) 315 (352) (519) 147Provision for Loan and Lease Losses (756) (434) (363) (322) (393)Credits Recoveries and Renegociated 162 167 161 (5) 1Banking Service Fees 1,794 1,799 1,405 (5) 389Result from Operations of Insurance, Cap. and Pension Plans 206 190 196 15 10Non-Interest Expenses, excluding ISS, PIS and COFINS (2,381) (2,480) (2,183) 99 (198)Personnel Expenses (955) (910) (773) (45) (182)Other Administrative Expenses (1,103) (1,218) (996) 115 (108)Tax Expenses - CPMF and others (76) (75) (58) (0) (18)Other Operating Expenses (247) (276) (355) 29 108Tax Expenses for ISS, PIS and COFINS (350) (320) (288) (30) (62)Equity in the Earnings of Associated Companies 95 44 30 51 65Other Operating Income 112 107 77 4 35Non-operating Income 6 27 (5) (21) 11Number of shares outstanding - In Thousand (1) 113,676,757 113,271,050 114,086,910 405,707 (410,153)Book value per thousand shares - (R$) (2) 128.69 123.34 109.38 5.34 19.31Net income per thousand shares - (R$) (2) 10.04 9.10 7.68 0.94 2.36(1) In thousands in Mar/04, as shares were reverse split in the fourth quarter of 2004.(2) Lot of thousand shares in Mar/04, as shares were reverse split in the fourth quarter of 2004.9 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Net Income<strong>Analysis</strong> of the Consolidated PerformancensolidatedPerformancelysisAnConsolidaPerformance10 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Net IncomeNet income in the first quarter of 2005In the first quarter of 2004, Itaú achieved consolidatednet income of R$1,141 million. This represents a 10.8%increase in the fourth quarter of 2004 and an annualizedreturn (ROE) of 35.1% on the R$ 14,629 balance of theconglomerate's net equity as of March 31, 2005. Onceagain Itaú's performance stands out in the Brazilianscenario, with twelve consecutive quarters of a returnon net equity above 30% per annum.Total assets amounted to R$ 146,403 million, increasingby 12.3% from the end of 2004. Accordingly, the returnon total assets (ROA) stood at 3.2% per annum.The Basle Ratio remained at high levels, reaching 18.3%in March 2005, corresponding to a 2.3 percentage pointdecrease from the fourth quarter of 2004. Such decline,when compared to the previous quarter, is attributableto variations in the weighted assets, in particular thesignificant growth of the loan portfolio and equitymarket-related transactions (shareholding restructuringof Corporate client) in the amount of R$ 3,716 million.These assets were part of the weighted assets that weresettled in the beginning of the second quarter of 2005.During the quarter, the Bank fully amortized the R$ 200million (R$ 182 million after taxes) arising from theassociation between Itaú and Lojas Americanas - LASA,which was accounted for as Extraordinary Gains in theperiod. The new partnership formed between Itaú andLASA will expand the client base of non-accountholders who use products and services offered by theBank, thus helping enlarge Taií's distribution network.In the first quarter of the year, Itaú continued to expandits consumer finance business on three fronts - directconsumer loans, vehicle financing and consignedcredit.The total balance of the loan portfolio, includingendorsement and sureties, grew by an impressive 7.0%in the period. Noteworthy was the growth in the privateindividual segment (+13.7%), reaching R$ 20,770 millionat the end of the first quarter of 2005. In particular, thebalance of personal credits improved dramatically, witha 22.2% rise as compared to the previous quarter. Vehiclefinancing also posted a significant 17.3% increase inthe quarter. In the corporate segment, the growthreached 4.7%, with the portfolios of micro, small andmedium businesses posting a 5.4% increase from theprevious quarter. The large corporation segment alsogrew by 4.4% compared to December 2004. Theexpansion in credit transactions has given a significantcontribution to Itaú's financial margin, lendingincreasing strength and consistency to the group'soperating results.Foreign Exchange and InterestThe first quarter of 2005 was characterized by twoimportant developments: the basic interest rate (Selic)increased from 17.75% per annum in December 2004 to19.25% per annum as of March 31, 2005; and, the real/U.S. dollar exchange rate showed more volatility. Suchvolatility was caused in part by the high internationalliquidity levels, the rate differentials, and the strongresults of the Brazilian trade balance. These factors wereoffset by actions taken by the Brazilian Central Bank,buying foreign currency on the spot market andreducing exchange swap positions, with a view torestore its international reserves. During the period, theConselho Monetário Nacional (National MonetaryCouncil - CMN) also approved new resolutions in orderto unify the foreign exchange markets and enacted newforeign exchange rules for exports. As a result of theunification, the exchange market is now subject to asingle set of rules. Normative differences between freerate and floating rate exchange markets ceased to exist.The new exchange regulation aims at relieving theburden on export activities. The new set of rules haslifted amount restrictions on the purchase and sale offoreign currency by either individuals or companies nspite of the significant exchange volatility, as at theend of the quarter the real/U.S. dollar rate had changedby only 0.4% compared to the closing rate of 2004.Macroeconomic IndicesCDI 4.2% 4.0% 3.8%Exchange Rate 0.4% -7.1% 0.7%Exchange Rate (Quotation in R$) 2.6662 2.6544 2.9086IGPM 1.5% 2.0% 2.7%Savings (TR + 6% p.a.) 2.1% 2.0% 1.9%11 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Net IncomeNet Interest MarginThe net interest margin of Itaú reached R$ 3,061 millionin the first quarter of 2005, growing by 1.6% from theprior quarter, excluding non recurring items which hada R$ 612 million (before taxes) effect on securities results.The strategy of expanding the volume of loan andfinancing transactions (in particular those transactionswhose contribution to the financial margin is larger)continues to represent an important contribution tothe Bank's results. In the first quarter of 2005, netfinancial margin on credit transactions grew by R$ 155million from the previous quarter.Treasury and gap management results declined by R$106 million in the quarter, which is essentially due tothe effect on the asset position in the IGP-M assumedby treasury, the fall of this index (impact of R$ 26 million)and R$ 68 million relating to expenses from exchangederivative instruments assumed to hedge investmentsabroad. The currency exposure is managed keeping inmind the related tax effects. Accordingly, as theexchange variation on investments is not taxed andgains on this liability position are tax-deductible, theimpact on net income caused a slight variation in thetreasury and gap management results, in the amountof R$ 10 million, which is further evidence of the lowexposure assumed by Itaú's treasury.The annualized rate of the net financial margin in thefirst quarter of 2005 was 13.2%, while in the previousquarter, disregarding the impact of non-recurring items,the annualized rate of the net financial margin was13.6%.Net Interest Margin <strong>Analysis</strong>R$ MillionAverage Cash and Cash Equivalents + Short-Term Interbank Deposits +Securities - Money Market Funding - Derivative Financial Instruments 33,843 33,224 34,138Average Interbank and Interbranch Accounts 11,405 11,071 8,914Average Net Foreign Exchange Portfolio (198) (257) (173)Average Net Loans 47,754 44,695 37,195(*) Net interest margin excluding the nonrecurring itens decribed(**)The average balance for the quarter is the arithmetical average of the balance on the last day of both the current quarter and the previous quarter.12 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated PerformanceResults from Doubtful LoansIn the first quarter of 2005, provisions for loan lossesamounted to R$ 756 million, which is a 74.1% increasefrom the previous quarter. The highly favorableconditions seen in the fourth quarter of 2004 were nolonger prevalent in the first quarter of 2005.Of the total expenses, R$ 150 million relate to provisionsrecorded in excess of the minimum required by theBrazilian banking system authority. The expansion inthe balance of the excess provision allows for theNon Performing LoansR$ Millionabsorption of any growth in defaulting levels broughtabout by the severe recession of the economic cycle,quantified in accordance with the historical behaviorof loan portfolios under stressful economic conditions.In addition, the Bank management considers itadequate to maintain the coverage ratio of the balanceof the provisions for loan losses over non performingloans at approximately 220%. Accordingly, the balanceof the excess provision for loan losses amounted to R$1,150 million as of March 31, 2005, increasing by 15.0%compared to December 2004.Total Non Performing Loans (a) 1,491 1,388 1,440Provision for Loan and Lease Losse (3,288) (3,054) (3,027)Credit Portfolio (b) 50,980 47,407 44,810NPL Ratio [ (a) / (b) ] x 100 2.9% 2.9% 3.2%(a) Loans overdue more than 60 days and without generation of revenues on the accrual method.(b) Endorsements and Sureties not included.<strong>Analysis</strong> of Results from Possible Loan LossesR$ Million(Increase)/Generic Reversal (55) (18) (74) (43) 3 (40) (12) (21) (33)(Increase)/Specific Reversal (452) (80) (533) (338) (55) (394) (114) (25) (139)Exceeding Provision (150) - (150)Credits Recoveries and Renegotiated 162 167 (5)With respect to the minimum provisions required, theBank recorded general allowances in the amount of R$74 million, representing an 82.2% rise compared to theprevious quarter. Such growth relates to the increasein the credit portfolio balance in the period, as well asto a change in the customers' risk rating criteria. Generalallowances of R$ 55 million were recorded for loansgranted to individual customers as a result of the stronggrowth in personal credit and vehicle financingoperations, giving rise to a R$ 12 million increasecompared to the fourth quarter of 2004.Specific allowances increased by 35.0%, for a total ofR$ 533 million in the period. The increase in specificallowances is due to the impact of the evolution of nonperforming loans.Income from the recovery of written-off loans reachedR$ 162 million in the first quarter of 2005, which isconsistent to revenues of R$ 167 million in the previousquarter.The ratio of non performing loans stood at 2.9%, whichis in line with the previous quarter, essentially as a resultof the market conditions experienced in the past fewmonths and, to a lesser extent, the impact oftransactions potentially recoverable in the long run,which were written-off from the provision for loan losses.However, it should be stressed that we do not foresee acontinuing improvement of credit quality indicators,since our strategy focuses on products providing higherspreads and higher risks. At this moment, we certainindicators point to the likelihood of increased provisionsin the future.13 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated PerformanceThe ratio of allowances for loan losses to the portfoliototal balance (excluding endorsement and sureties)remained stable quarter-on-quarter, at 6.4%.The latitude between the provision for loan losses andthe amount of overdue loans reached R$ 332 million inthe quarter, which is a 42.3% decline from the previousquarter.Abnormal Portfolio (*)(*) Abnormal Portfolio is the total of installments overdue for more than 14 days.R$ MillionAbnormal Portfolio 2,956 2,478 2,590Total Allowance (3,288) (3,054) (3,027)Excess of Allowance 332 575 437Coverage Ratio (*)189%173%189%198%202%204%210%220%221%Mar 31, 03Jun 30, 03Sep 30, 03Dec 31, 03Mar 31,04Jun 30, 04Sep 30, 04Dec 31, 04Mar 31, 05Movements of Credit Portfolio(*) Provision for Loan and Lease Losses / Total Non Performing LoansR$ MillionBalance arising from the increased shareholding in Credicard. - - - 799 - 799New Contracts 6,651 12,045 18,696 6,810 12,474 19,284Debt Renegotiation 264 372 636 276 61 337Accrual/ Movements (1,438) (876) (2,314) (1,108) (1,398) (2,506)Settlement (2,637) (10,288) (12,925) (3,570) (11,283) (14,853)Write-off (372) (149) (521) (253) (210) (463)Movements of Provision for Loan LossesR$ MillionNew Contracts (200) (131) - (331) (406) (175) - (581)Debit Renegociation (124) (18) - (142) (143) (24) - (166)Risk Level Transfer (479) (96) (576) (305) (70) (375)Accrual/ Movements 87 21 108 16 (205) (189)Settlement 209 125 335 456 421 877Exceeding Allowance - - (150) (150) - - -Total (507) (98) (150) (756) (382) (52) - (434)Balance arising from the increased shareholding in Credicard. - - - - (56) - - (56)Write-off 372 149 - 521 283 180 - 46314 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated PerformanceBanking Service FeesR$ MillionMutual Fund <strong>Management</strong> Fees 385 356 28Income from Administration of Consortium 13 19 (6)Credit Operations 247 242 6Income from Guarantees Provided 23 25 (1)Collection 95 97 (1)Interbank Fees (Bills, Checks and Documents) 49 48 1Tax Collection 65 156 (92)Foreign Exchange Services 12 10 3Brokerage Services 28 30 (2)Income from Inquiries of the Serasa Databases 39 38 1Custody Services and Managed Portfolios 11 11 0Other Services 40 69-(28)-In the first quarter of 2005, Banking Service Fees totaledR$1,794 million, presenting a R$5 million decrease inrelation to the R$1,799 million in the previous quarter.Disregarding the fortuitous event that occurred inDecember 2004, when was recognized the R$124million revenue for tax collection services provided forthe INSS, which did not occurred in the first quarter of2005, Banking Service Fees shows a significant growthof R$119 million in relation to the previous quarter,which is equivalent to 7.1%.This growth was driven by Credit Card Revenues, whichshowed an increase of R$66 million. A major part ofthis growth is derived from the increase in Orbitall andCredicard Banco share that took place in the fourthquarter of 2004. In that quarter, the increased shareonly affected the results of two months in the case ofBanking Service Fees Coverage Index over Non InterestExpensesCredicard and of one month in the case of Orbitall, whileall three months of the first quarter of 2005 wereaffected.Other items that showed significant growth wereMutual Funds <strong>Management</strong> Fees, with a balance of R$28million. The growth arised from the larger volume ofresources under management, coupled with theincrease in interest rates, and Tax Collection Revenues,which grew R$32 million, disregarding, however, the onetime event mentioned previously. This growth wascaused by the seasonal effect of the receipt of taxes likeIPVA, IPTU and DPVAT at the beginning of the year.It is also important to point out the contribution fromCurrent Account Revenues, which grew due to the pricereadjustment.Products per Client and Quantities : Active Clients andCurrent Accounts(Million)5.114.12.Q./03 3.Q./03 4.Q./03 1.Q./04 2.Q./04 3.Q./04 4.Q./04 1.Q./05Non Interest ExpensesPersonnel ExpensesDec.03 Mar.04 Jun.04 Sep.04 Dec.04 Mar.05Active ClientsCurrent Accounts(*) Calculated by dividing Banking Service Fees by Personnel Expenses and by Non InterestExpenses (Personnel Expenses, Others Administrative Expenses, Tax Expenses of CPMF andOthers and Other Operating Expenses)15 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Net IncomeNon Interest ExpensesR$ MillionRemuneration 437 453 486 506 517 12Charges 133 140 152 158 163 5Social Benefits 116 119 114 128 138 10Training 8 14 11 15 8 (7)Employee Resignation and Labor Claims 79 66 75 86 128 42Single Bonus - 0 8 17 - (17)Data Processing and Telecommunication 266 262 267 282 276 (6)Depreciation and Amortization 137 139 136 191 145 (47)Premises 131 134 133 156 147 (8)Third-Party Services 138 159 168 195 193 (2)Financial System Service 78 80 81 85 82 (3)Advertising, Promotions and Publications 56 72 74 103 62 (41)Transportation 47 43 46 49 46 (3)Materials 31 35 39 38 36 (2)Security 31 31 33 33 32 (0)Legal and Judicial Suit 17 15 11 22 18 (4)Travel Expenses 8 11 12 15 9 (6)Others 55 53 41 51 58 7Provision for contingencies 203 165 80 86 86 (0)Tax and Social Securities 38 36 31 33 33 (0)Civil Lawsuits 138 83 51 63 53 (10)Others 27 45 (3) (10) - 10Sales - Credit Cards 48 50 43 70 62 (8)Claims 16 24 23 21 26 5Others 88 74 74 100 74 (26)CPMF 40 33 40 55 58 3Other taxes 18 21 14 20 18 (2)(-) Itaucred (Vehicle + Credit Cards - Non-Account Holders + Taií) (185) (196) (208) (273) (288) (15)(-) Orbitall (57) (58) (64) (91) (146) (55)Non Interest Expenses, which includes Personnel Expenses,Other Administrative Expenses, Other Operating Expensesand Tax Expenses (CPMF and Other Taxes), reachedR$2,381 million in the first quarter of 2005, which representsa reduction of R$ 99 million, when compared to the R$2,480million recorded in the last quarter of 2004.New ventures were responsible for an increase of R$70million in Non Interest Expenses, when compared to thefourth quarter of 2004, and resulted in expenditures ofR$434 million in the first quarter of 2005, or 18.2% of thetotal of these expenses.Non Interest ExpensesIn the current quarter, the Non Interest Expenses remainedvirtually stable when compared to the first quarter of theprevious year, if the effect of the new ventures isdisregarded, which demonstrates the efficiency of Itaú'scost control.Personnel ExpensesPersonnel Expenses totaled R$955 million, showing anincrease over the R$910 million recorded in the last quarterof the previous year. This increase is due mainly to theEmployee Resignation and Labor Claims items, which grewby R$42 million. Labor Claims were influenced by a programthat provides additional indemnity for the termination ofemployees based on conditions of retirement.-1st Q.04 2nd Q.04 3rd Q.04 4th Q.04 1st Q.0516 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Net IncomeThis increase was offset with a reduction of R$ 17 millionas a result of the bonus negotiated in the collective laboragreement, which occurred in the fourth quarter of 2004.It is important to point out that the increased share inOrbitall and in Credicard Banco produced an increase ofR$ 26 million in Personnel Expenses in the current quarter.At the end of the month of March 2005 Itaú had 44,992employees. It is important to point out that, in spite ofthe reduction in the total number of employees, Taiíshowed an increase of 315 employees, showing thefocus on expanding the granting of credit to segmentsnot previously served by Itaú; it should also be notedthat the average cost of Taií employees is lower thanthe cost in Itaú.By the end of 2005, the hiring of another 5,000employees for Taií is expected, including thecollaborators from FIC (CBD) and from FAI (LASA).Other Adminsitrative ExpensesOther Administrative Expenses totaled R$1,103 million inthe first quarter of 2005, showing a decrease of R$115million in relation to the R$1,218 million of the previousperiod.One of the factors for this reduction is the seasonal effectof the reduction in marketing expenses that usually occursat the beginning of each year. This seasonality caused adecrease of R$41 million in Expenses with Advertising,Promotions and Publications. Another item that is alsoinfluenced by seasonal factors is Premises, which showeda fall of R$8 million in this quarter.In the current quarter, Itaú introduced the accountingpractice of fully depreciating assets with residual valuesbelow R$3,000.00. In 2004, Itaú adopted this practice onlyin the fourth quarter.Number of Employees (*) (**)Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Sep/04 Dec/04 Mar/05(*) Includes Orbitall and Intercap bank’s sales promotion company since Dec/04.(**) Credicard Banco and FIC, where Itaú’s share is 50%, are not included. In Mar.05 thiscompanies had, respectively, 419 and 811 employees,Tax Expenses for CPMF and OthersTax Expenses for CPMF and Other Taxes totaled R$76million in the first quarter, which is fairly consistent withthe R$75 million recorded in the previous quarter.Efficiency RatioThe efficiency ratio was 49.4% in the first quarter of 2005,which represents a 3.5 p.p. increase in relation to theprevious quarter. This increase was already expected,since in the fourth quarter of 2004 the efficiency ratioreached 45.9% mainly due to occasional events thathad a positive effect on the financial margin andbanking service fees. Without these events, the ratiofor the fourth quarter of 2004 would be 50.9%, whichdemonstrates an improvement in the ratio in thisquarter.Efficiency RatioOther Operating ExpensesIn the first quarter of 2005, Other Operating Expensesreached R$247 million, a reduction of R$29 million inrelation to the previous quarter. This reduction isattributed to the setting up of operating provisions forcontingent liabilities that took place in the fourthquarter of 2004.47.5% 54.6% 56.3% 59.9%58.0%55.8%52.5%45.9%49.4%1.Q./03 2.Q./03 3.Q./03 4.Q./03 1.Q./04 2.Q./04 3.Q./04 4.Q./04 1.Q./05Efficiency Ratio =Non Interest Expenses (Personnel Expenses + Other Administrative Expenses + Other Operating Expenses +Tax Expenses for CPMF and Others )(Net Interest Income + Banking Service Fees + Partial Result of Insurance, Capitalization and Pension Plans +Other Operating Income - Tax Expenses of PIS/COFINS/ISS)17 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Net IncomeNetwork Evolution (*)Number of Taií Stores3Mar/03 Jun/03 Sep/03 Dec/03 Mar/04 Jun/04 Sep/04 Dec/04 Mar/05ATM Branches CSB(*) Includes Banco Itaú Buen Ayre and Banco Itaú BBA. Not includes Taií.Jun/04 Sep/04 Dec/04 Mar/05Own StoreFIC (CBD)Customer service locations totaled 24,422 in March 2005,against 24,223 in December 2004. The growth is due toItaú focusing on the expansion of its ATM network, whichincreased by 196 units in the period.In the first quarter of 2005, the FIC finance company cameinto operation, as a result of the association between Itaúand the Pão de Açúcar Group (CBD). At the end of March2005, FIC had already opened three stores, all of whichoperate with the Taií brand.Besides FIC's three stores, Taií had 52 own stores (7 stores,34 corners and 11 annexes) in the Greater São Paulo andGreater Rio de Janeiro regions.The estimated quantity of Taií stores at the end of 2005 is570, which is made up of 150 stores of its own, 250 FICand 170 FAI. FAI is a finance company that resulted fromthe association between Itaú and Lojas Americanas (LASA)and will come into operation in the second half of 2005.Internet Banking Clients(In million)Mar.03 Jun.03 Sep.03 Dec.03 Mar.04 Jun.04 Sep.04 Dec.04 Mar/05Clients who used the service during the monthRegistered clientsVolume of Self-Service Transactions(Quantity in million)1st Q./02 224 27 69 33 10 13 59 3 19 4572nd Q/02 225 46 70 38 10 11 71 3 20 4943rd Q./02 243 48 72 31 10 9 84 3 23 5244th Q./02 254 71 73 33 10 6 92 2 27 5691st Q./03 260 67 75 37 10 5 95 2 26 5762nd Q/03 248 117 76 36 10 4 99 2 28 6213rd Q./03 254 151 75 36 11 3 111 2 30 6754th Q./03 271 251 76 36 10 1 121 2 36 8051st Q./04 263 237 77 33 9 0 127 2 34 7832nd Q/04 258 139 78 32 8 0 130 2 37 6863rd Q./04 272 152 81 32 9 0 130 2 40 7194th Q./04 280 163 85 32 9 - 137 2 47 7541st Q./05 277 156 88 30 9 - 149 2 45 756(*) Transaction through warning screen on ATM.18 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated PerformanceAOLA OperationThe value of Itaú's holding in América Online Latin AmericanInc. (AOLA), considering the market quotation of its stock atMarch 31, 2005, amounted to R$13 million. In Itaú's FinancialStatements on that same date, however, it had been fullyprovisioned for and, as a consequence, no future negativeimpacts on results should be shown.There remains in the books, under Sundry Other Liabilities,R$163 million arising from amounts received in advance,relating to the contract for the provision of services existingbetween the parties. These amounts are accrued to incomeas, and when, the expenditure relating to the contractedservices take place.Tax Expenses for ISS, PIS and COFINSThe 9.4% growth in tax expenses in the first quarter of 2005,when compared with the fourth quarter of 2004, was due tothe increase in operating activities, as well as the effect of theincrease in the participating interest in Orbitall and in Credicard.The increase in Credicard's shareholding, created an impacton the consolidated results for two months of the fourth quarterof 2004, while the alteration in Orbitall's shareholding, createdan impact during one month in the consolidated results forthe same period. In the first quarter of 2005, the three monthsof the period were impacted by the increased participatinginterests.R$ MillionNon-operating ResultThe non-operating result for the first quarter of 2005 reachedR$6 million, which is a reduction of R$21 million in relation tothe previous quarter. In the current quarter, we did not havethe positive impact associated with the criteria revision forsetting up a provision for the impairment of assets not in usethat took place in the fourth quarter of 2004. During the fourthquarter of 2004, because of changes in market conditions, wemade a reversal of part of the provisions that was previouslyset up relating to these expected impairments.Income Tax and Social ContributionThe expenditure on Income Tax and Social Contribution onNet Income in the first quarter of 2005 was R$536 million, whichis a reduction of 31.2% in relation to the fourth quarter of 2004.This decrease is due to the 28.5% reduction in the results beforeincome tax and social contribution. Also during the fourthquarter of 2004 the Company was burdened by the inability todeduct the exchange rate variation on investments abroad andthe taxation of the revenues from the financial instruments usedto hedge these investments. The variation of the United Statesdollar was 0.4% in the first quarter of 2005, compared to areduction of 7.1% in the fourth quarter of 2004.R$ MillionPIS/COFINS 286 265 21 7.9%ISS 64 55 9 16.6%Exchange Variation on Investments Abroad (13) (116) 103Interest on Own Capital 119 175 (56)Others 21 89 (69)Equity in the Earnings of AssociatedCompaniesEquity in the earnings of associated companies added up toR$95 million in the first quarter of 2005, a 35.1% increase inrelation to the previous quarter. This result is basically derivedfrom the participating interest in Banco BPI S.A. The Impact ofthe introduction of IFRS in European Union countries isalready reflected in our books, as much in the result ofpatrimonial equity of this quarter as in the net incomeaccumulated in 31 of december of 2004, in total of R$87 millions, and refer basicaly to adjusts in pension plans.R$ MillionShare of equity in affiliates – domestic 2 4 (2)Share of equity in affiliates - foreign 93 40 52One of the items that Itaú's management manages is the levelof tax credits in relation to net equity. The historical performanceof this ratio since December 2000 is shown below.Tax Credits x Stockholders' Equity (%)70.0%61.0%60.0%55.9% 57.7%50.0% 59.4%54.5%40.0%30.0%20.0%10.0%0.0%49.8%43.3%Dec-00Mar-01Jun-01Sep-01Dec-01Mar-02Jun-02Sep-02Dec-02Mar-03Jun-03Sep-03Dec-03Mar-0438.2%34.3%33.0%Jun-04Sep-04Dec-04Mar-05Extraordinary ResultThe extraordinary negative result of R$142 million in the firstquarter of 2005 is basically associated with the expenses ofR$200 million (R$182 million net of the tax effects) arising fromthe full amortization of the goodwill paid in the process ofassociating Itaú with Lojas Americanas S.A.19 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Pro Forma Financial StatementsStatementsProncialFormaStatFinancialPro Form20 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Pro Forma Financial StatementsSegmentationWe present below the new Itaú segmentation structure.The results of recent investments and new strategicinitiatives undertaken by the Bank will be aggregatedunder the Itaucred segment. Itaucred results willcomprise those transactions carried out throughchannels intended for non-account holder customers,including Taií (consumer direct credit and consignedITAÚcredit), Vehicles and Credit Cards. It should be stressedthat the increase in our interests in Credicard hassignificantly expanded Itaú's business opportunities,since the shareholders' agreement provides for takingadvantage of cross-selling opportunities to nonaccountholder customers.ITAUBANCOITAÚ BBAITAUCREDCORPORATIONVEHICLESCREDIT CARDS –NON-ACCOUNTHOLDERSTAIÍBANKINGCREDIT CARDS –ACCOUNTHOLDERSINSURANCE,PENSION PLANSANDCAPITALIZATIONMUTUAL FUNDSAND MANAGEDPORTFOLIOINSURANCEAllocated CapitalThe pro forma financial statements were adjusted toaccount for the effects of the capital allocation baseon a proprietary model which considers the credit,market and operating risks, as well as the regulatoryframework and the level of capital expenditures.This enabled the computation of the Return onAllocated Capital, which corresponds to a performancemeasure consistently adjusted to the capital requiredto support the risk from the asset positions assumed.The adjustments made to the balance sheet andincome statement for the year are based onmanagement information provided by the businessunits.The "Corporation" column shows results associatedwith excess capital and subordinated debt, as well asthe equity in the earnings of subsidiary and associatedcompanies not related to the individual segments. ThePENSION PLANSCAPITALIZATIONAdjustments to the Financial Statementscolumn also includes Minority Interest in income fromsubsidiary companies and Extraordinary Gains.The tax effects of the payment of Interest on OwnCapital for each segment were reversed andsubsequently reallocated to each segment inproportion to Tier I capital levels, while the financialstatements were adjusted to replace net equity withfunding at market prices. The financial statements werethen adjusted to incorporate revenues arising fromallocated capital. Finally, the costs of subordinated debtand related remuneration at market prices wereproportionately allocated to the segments inaccordance with Tier I allocated capital.The schedule below describes the changes made forthe financial statements to reflect the impacts of theallocation of regulatory capital.Return onStockholders’EquityNet IncomeStockholders’ EquityAdjusts in the FinancialStatements to replacethe net book value ofStockholders’ Equity andSubordinated Debt byfunding at market prices.The financial statementswere adjusted to includeallocated capital (Tier Iand II) based onproprietary model, aswell as its revenues(CDI) and expenses(cost of subordinateddebt).Return onAllocated Tier ICapitalNet IncomeAllocated Tier ICapital21 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Pro Forma Financial StatementsThe following tables are based on the pro forma financial statements of Itaubanco, Itaú BBA and Itaucred, usinginternally generated information, in such a way as to more accurately reflect the activity of the business units.On March 31, 2005R$ MillionCash and Cash Equivalents 1,892 71 - 0 1,963Short-term Interbank Deposits 33,144 13,519 - 168 22,002Short-term Interbank Deposits - Intercompany 14,867 9,797 - - -Other 18,277 3,722 - 168 22,002Securities 20,300 7,124 - 4,232 29,750Interbank and Interbranch Accounts 11,911 39 - 0 11,932Loan Operations 20,451 17,168 10,072 - 47,692Other Assets 29,711 2,922 149 275 30,065R$ MillionDeposits 45,291 19,099 - - 44,025Deposits - Intercompany 5,506 14,867 - - -Other 39,785 4,232 - - 44,025Securities Repurchase Agreements 10,901 3,179 7,753 - 17,367Securities Repurchase Agreements - Intercompany 4,291 - - - -Other 6,610 3,179 7,753 - 17,367Funds from Acceptances and Issue of Securities 3,857 884 - - 3,750Interbank and Interbranch Accounts 1,790 313 - - 2,085Borrowings 2,624 7,603 - - 10,229Derivative Financial Instruments 2,303 769 - 0 2,243Other Liabilities 33,651 5,828 1,413 1,454 39,271Technical Provisions 11,554 - - - 11,554Note: The Consolidated figures do not represent the sum of the parts because certain intercompany transactions were eliminated only at the Consolidated level.Pro Forma Financial StatementR$ MillionProvision for Loan and Lease Losses (577) (22) (157) - (756)Credits Recoveries and Renegotiated 96 89 38 (60) 162Banking Service Fees 1,543 80 172 (1) 1,794Partial Result of Insurance, Capitalization and Pension Plans 206 - - - 206Non-Interest Expenses (1,955) (130) (288) (7) (2,381)Taxes Expenses for ISS, PIS and COFINS (263) (23) (34) (30) (350)Equity in the Earnings of Associated Companies - - - 95 95Other Operating Income 72 15 14 10 112Non-Operating Income 9 0 (2) (1) 6Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.22 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Pro Forma Financial StatementsOn December 31, 2004R$ MillionCash and Cash Equivalents 1,809 115 - 0 1,930Short-term Interbank Deposits 28,022 8,409 - 150 19,747Short-term Interbank Deposits - Intercompany 11,122 5,658 - - -Other 16,900 2,751 - 150 19,747Securities 18,303 7,646 - 5,182 29,176Interbank and Interbranch Accounts 10,761 129 - 0 10,878Loan Operations 18,830 16,832 8,691 - 44,354Other Assets 21,295 694 118 494 21,135R$ MillionDeposits 41,703 15,093 - - 42,030Deposits - Intercompany 3,620 11,122 - - -Other 38,083 3,971 - - 42,030Securities Repurchase Agreements 9,533 2,510 6,121 - 16,098Securities Repurchase Agreements - Intercompany 2,038 - - - -Other 7,495 2,510 6,121 - 16,098Funds from Acceptances and Issue of Securities 3,558 838 - - 3,431Interbank and Interbranch Accounts 885 205 - - 1,078Borrowings 2,328 8,190 - - 10,518Derivative Financial Instruments 908 1,150 - 1 1,173Other Liabilities 24,276 2,712 1,767 2,469 29,775Technical Provisions 11,023 - - - 11,023Note: The Consolidated figures do not represent the sum of the parts because certain intercompany transactions were eliminated only at the Consolidated level.Pro Forma Financial StatementR$ MillionProvision for Loan and Lease Losses (364) 27 (97) - (434)Credits Recoveries and Renegotiated 107 4 56 - 167Banking Service Fees 1,568 84 148 (1) 1,799Partial Result of Insurance, Capitalization and Pension Plans 190 - - - 190Non-Interest Expenses (2,045) (159) (273) (5) (2,480)Taxes Expenses for ISS, PIS and COFINS (225) (30) (33) (37) (320)Equity in the Earnings of Associated Companies - - - 44 44Other Operating Income 89 16 8 0 107Non-Operating Income 27 1 (0) 0 27Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.23 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Pro Forma Financial Statements by SubsegmentFinancial Statements per SegmentBelow are the balance sheets and statements of income for the Banking, Credit Card - Account Holders, Insurance,Pension Plan and Capitalization segments of Itaubanco, which have been adjusted to reflect the impacts ofcapital allocation to each segment (pro forma).On March 31, 2005R$ MilliionCash and Cash Equivalents 1,884 29 32 1,892Short-term Interbank Deposits 34,057 478 637 33,144Securities 7,636 790 11,694 20,300Interbank and Interbranch Accounts 11,911 - - 11,911Loan Operations 21,073 2,335 - 20,451Other Assets 28,339 777 1,425 29,711R$ MilliionDeposits 45,228 - - 45,291Securities Repurchase Agreements 11,725 - - 10,901Funds from Acceptances and Issue of Securities 3,857 - - 3,857Interbank and Interbranch Accounts 1,790 - - 1,790Borrowings 2,624 157 - 2,624Derivative Financial Instruments 2,295 - 0 2,303Other Liabilities 32,377 3,967 1,164 33,651Technical Provisions - - 11,554 11,554Note: The Consolidated figures do not represent the sum of the parts because certain intercompany transactions were eliminated only at the Consolidated level.Pro Forma Financial StatementR$ MillionProvision for Loan and Lease Losses (525) (51) - - (577)Credits Recoveries and Renegotiated 82 14 - - 96Banking Service Fees 728 384 36 396 1,543Transfer to Banking 185 - - (185) -Result from Op. of Insurance, Capitalization and Pension Plans 23 - 183 - 206Non-Interest Expenses (1,427) (297) (144) (86) (1,955)Taxes Expenses for ISS, PIS and COFINS (186) (34) (25) (18) (263)Other Operating Income 70 1 2 - 72Non-Operating Income 2 2 5 - 9Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.24 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Pro Forma Financial Statements by SubsegmentOn December 31, 2004R$ MillionCash and Cash Equivalents 1,776 29 31 - 1,809Short-term Interbank Deposits 28,926 433 625 - 28,022Securities 6,010 786 11,143 - 18,303Interbank and Interbranch Accounts 10,761 - - - 10,761Loan Operations 16,346 2,510 - - 18,830Other Assets 19,889 980 1,466 - 21,177R$ MillionDeposits 41,901 - - - 41,703Securities Repurchase Agreements 9,546 9 - - 9,533Funds from Acceptances and Issue of Securities 3,558 - - - 3,558Interbank and Interbranch Accounts 885 - - - 885Borrowings 2,183 161 - - 2,328Derivative Financial Instruments 894 - 3 - 908Other Liabilities 20,254 4,320 1,273 - 24,276Technical Provisions - - 11,023 - 11,023Note: The Consolidated figures do not represent the sum of the parts because certain intercompany transactions were eliminated only at the Consolidated level.Pro Forma Financial StatementR$ MillionProvision for Loan and Lease Losses (306) (58) - - (364)Credits Recoveries and Renegotiated 17 - - 107Banking Service Fees 893 277 34 364 1,568Transfer to Banking 178 - - (178) -Result from Op. of Insurance, Capitalization and Pension Plans 40 - 151 - 190Non-Interest Expenses (1,507) (287) (152) (99) (2,045)Taxes Expenses for ISS, PIS and COFINS (146) (38) (23) (18) (225)Other Operating Income 93 (4) - - 89Non-Operating Income 20 1 5 - 27Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.25 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Itaubanco - BankingThe statement of income of the Banking segment of Itaubanco, shown below, is based on Banco Itaú's pro formafinancial statements.R$ MillionProvision for Loan and Lease Losses (525) (306) - (306) (219)Credits Recoveries and Renegotiated 82 90 - 90 (8)Banking Service Fees 913 1,071 124 947 (34)Result from Op. of Insurance, Capitalization and Pension Plans 23 40 - 40 (16)Non-Interest Expenses (1,427) (1,507) - (1,507) 80Taxes Expenses for ISS, PIS and COFINS (186) (146) - (146) (40)Other Operating Income 70 93 - 93 (23)Non-Operating Income 2 20 - 20 (18)Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.The analysis that follows takes into consideration theinformation for the first quarter of 2005 compared tothe adjusted results for the fourth quarter (excludingany non recurring items).The Banking segment of Itaubanco's net incometotaled R$ 469 million in the first quarter of 2005,corresponding to a 26.4% decline from the previousquarter.In the first quarter of 2005, the financial margin of theBanking segment was R$ 1,711 million, consistent withthe R$ 1,701 margin recorded in the previous quarter.The growth in the micro, small and medium businessescredit portfolio helped to expand the financial marginon credit transactions. However, treasury and gapmanagement results showed a decline in the quarter,which was partially offset by the tax effects on hedgetransactions.Results from doubtful loans in the first quarter of 2005amounted to R$ 443 million, increasing by R$ 227 millionfrom the previous quarter. In the first quarter of 2005,the balance of the Banking segment provision in excessof the minimum required by the bank system authoritieswas increased by R$ 132 million. Furthermore, a portionof the doubtful loan provision expenses arise fromchanges introduced in the risk rating criteria for certainIndividual customers, as well as the effects of theevolution of overdue loans.Non interest expenses totaled R$ 1,427 million in thequarter, which is a R$ 80 million decrease as comparedto the previous quarter. This decline relates to theseasonal reduction in marketing expenses, as well as toa new accounting policy adopted with respect to theappropriation of the depreciation of goods whose netvalue is under R$ 3,000.00.Non operating results for the first quarter of 2005 posteda R$ 18 million change compared to the previousquarter. In the previous quarter, goods not for use (tobe sold) were revalued and, as a consequence, a R$ 12million reversal was recorded in the related provisions.Finally, net Income Tax and Social Contributionexpenses decreased, as a result of the tax effect ofderivative currency hedging transactions oninvestments abroad.26 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Credit CardsThe pro-forma financial statements below were prepared based on Itaú internal management information andare intended to report the performance of the businesses connected with the Credit Cards of current accountholding customers, including Itaucard, Orbitall e Redecard.. R$ MillionProvision for Loan and Lease Losses (51) (58) 7Credits Recoveries and Renegotiated 14 17 (4)Service Fees 384 277 107Non-Interest Expenses (297) (287) (11)Tax Expenses for ISS, PIS and COFINS (34) (38) 4Other Operating Income 1 (4) 5Non-Operating Income 2 1 1Income Tax and Social Contribution (80) (39) (41)Profit Sharing (43) (7) (36)Net income generated by the Credit Card – CurrentAccount Holders segment reached R$105 million inthe first quarter of 2005, a 51.1% increase whencompared with the previous quarter.The financial margin showed slight growth, even withthe great volume of financing, because there was areduction in the spread, due to constant increases inthe funding rate (CDI). The lower volume of financing,typical of the first quarter, had a positive impact on theallowance for loan losses, requiring less expenditure onthe general setting up allowance.Service income showed remarkable growth, duebasically to the increase in the participating interest inOrbitall, which took place in the fourth quarter butproduced an effect in one month only (Dec/04). Thisincrease was coupled with greater service fee income(processing) at Orbitall. Non-recurring interestexpenses were slightly higher, also due the effect ofthe increase in the share of ownership mentionedabove.Quantity of Credit Cards and Market Share12.2%12.1%12.4%13.0%13.5%14.1%The card base increased itself from 7,085 thousand inDecember 2004 to 7,518 thousand in March 2005,which shows 6.1% growth in the first quarter of 2005.The volume of transactions in the period totaled R$3,6billion, a fall of 9.4% when compared with theprevious quarter.Volume of Transactions3,0482,7102,9963,2364,0133,6364th Q./03 1st Q./04 2nd Q./04 3rd Q./04 4th Q./04 1st Q./05Diners1.3%R$ MillionIn March 2005, Itaucard had a level of active accounts(accounts that are billed) of 81.5%, of which 79.7%had transactions in the last month. The averageturnover in the quarter was R$1,021.60 per account.Quantity of Credit Cards by Brand - Mar 31, 05Visa31.9%5,780 5,951 6,261 6,639 7,085 7,518Dec/03 Mar/04 Jun/04 Sep/04 Dec/04 Mar/05Number of Credit Cards (thousand) Market Share (%)Mastercard66.9%27 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Insurance, Pension Plan and CapitalizationThe pro forma financial statements below were prepared based on Itaú internal management informationand are intended to identify the performance of the insurance businesses.On March 31, 2005R$ MillionCash and Cash Equivalents 27 5 0 32Securities 1,063 10,158 1,194 12,331Other Assets 1,134 260 14 1,425Technical Provisions - Insurance 1,128 278 - 1,406Technical Provisions - Pension Plan 1 9,113 - 9,114Technical Provisions - Capitalization - - 1,039 1,033Other Liabilities 864 271 99 1,164Statement of Income of the SegmentR$ MillionRevenues from Insurance 435 76 - 511Revenues from Pension Plans - 659 - 659Revenues from Capitalization - - 194 193Insurance 3 15 - 18Pension Plans - (256) - (256)Capitalization - - (144) (144)Retained Claims (264) (30) - (295)Selling Expenses (86) (14) (8) (108)Other Operating Income/(Expenses) of Insurance Operations 7 (6) (1) 1Service Fees - 36 - 36Non-Interest Expenses (80) (33) (30) (143)Tax Expenses of ISS, PIS and COFINS (14) (7) (4) (25)Financial Margin 42 62 26 123Non-Operating Income 2 0 2 5Income Tax / Social Contribution (11) (27) (10) (46)Profit Sharing (1) (0) - (1)Note: The Consolidated figures do not represent the sum of the parts because certain intercompany transactions were eliminated only at the Consolidated level.All the information related to VGBL was classified among the pension plan products.Non-Interest Expenses comprises Personnel Expenses, Other Administrative Expenses, Tax Expenses – CPMF and Other Taxes and Other Operating Expenses..28 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Insurance, Pension Plan and CapitalizationOn December 31, 2004R$ MillionCash and Cash Equivalents 22 9 0 31Securities 1,099 9,533 1,217 11,768Other Assets 1,148 297 15 1,466Technical Provisions - Insurance 1,124 289 - 1,413Technical Provisions - Pension Plan - 8,565 - 8,565Technical Provisions - Capitalization - - 1,050 1,045Other Liabilities 961 277 115 1,276Statement of Income of the SegmentR$ MillionRevenues from Insurance 437 105 - 540Revenues from Pension Plans - 922 - 922Revenues from Capitalization - - 235 234Insurance (36) (15) - (51)Pension Plans - (622) - (622)Capitalization - - (180) (170)Retained Claims (255) (13) - (266)Selling Expenses (82) (14) (7) (103)Other Operating Income/(Expenses) of Insurance Operations (11) (1) - (19)Service Fees - 34 - 34Non-Interest Expenses (68) (49) (31) (152)Tax Expenses of ISS, PIS and COFINS (13) (6) (4) (23)Financial Margin 35 57 26 115Non-Operating Income 4 0 2 5Income Tax / Social Contribution 2 (14) (12) (23)Profit Sharing (6) (0) - (6)Note: The Consolidated figures do not represent the sum of the parts because certain intercompany transactions were eliminated only at the Consolidated level.All the information related to VGBL was classified among the pension plan products.Non-Interest Expenses comprises Personnel Expenses, Other Administrative Expenses, Tax Expenses – CPMF and Other Taxes and Other Operating Expenses..29 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Insurance, Pension Plan and CapitalizationInsuranceThe pro forma net income of the insurance companiesgrew by R$26 million in the quarter to reach R$ 33 million,chiefly as a result of the increase in earned premiums.In the first quarter of 2005, earned premiums totaled R$529 million, compared to R$ 489 million in the previousquarter, with an increase in the automobile andproperty risks lines, and a decline in transportation line.The growth in DPVAT earned premiums in the firstquarter is attributable to seasonal factors.The automobile line achieved R$ 207 million in earnedpremiums in the first quarter of 2005, which is a 1.1%increase compared to the fourth quarter of 2004.Life insurance reached R$ 155 million in earnedpremiums in the period, which is consistent with theprevious quarter.Earned premiums in the property risks line, whichincludes residential insurance, grew by 4.6%, reachingR$ 62 million. The rise continues to reflect the increasedvolume of residential insurance policies sold undercampaigns carried out at the branch level.Retained claims increased by R$ 29 million, from R$ 266million to R$ 295 million in the first quarter of 2005,mainly from the increased level of claims in the life andpersonal accident lines.The breakdown of earned premiums by line of insurancecan be seen in the graphs below.The automobile share in the total earned premiums inthe quarter was 40.8%, while the life and personalaccident line accounted for 30.4% of the total.95.0% 94.2%93.7%92.9%90.9%21.9% 23.8% 18.9%18.6%Insurance Claims /Earned PremiumsSelling Expenses /Earned PremiumsNumber of policies - Mass Products2,268Automobile19.9%54.5% 50.5%2,349Life19.4%55.4%2,34523.4% 20.5%19.8% 19.1%49.7% 51.2%1st Q./04 2nd Q./04 3rd Q./04 4th Q./04 1st Q./05549 586565Administrative Expenses /Earned Premiums2,435PropertyIn Thousand2,443569 561906 952 953 1039 1063813 811 828 826 81803/31/2004 06/30/2004 09/30/2004 12/31/2004 03/31/2005The number of life and personal accident policies grewto 1,063 thousand at the end of the quarter.The amount of both automobile and residential productpolicies showed a slight decline, totaling 818 thousandand 561 thousand policies, respectively, at the end ofthe first quarter of 2005.Claim RatioThe total claim ratio remained virtually stable, standingat 51% in the first quarter of 2005, as the decreasednumber of claims in the automobile line was offset bythe increased amount of claims in the life and personalaccident lines.Composition of Earned Premiums1 st Quarter / 200512.4%40.8%4.2%12.2%4 th Quarter / 20048.3%4.8% 42.6%12.3%54%51%55%50%51%1st Q./04 2nd Q./04 3rd Q./04 4th Q./04 1st Q./0530.4%Automobile Life Property Transportation OtherCombined RatioThe combined ratio referring to insurance transactionsshowed a reduction due to the reduced level ofAdministrative Expenses as a proportion of EarnedPremiums.32.1%Private Pension PlansDuring the first quarter of 2005, the private pension plansegment revenues amounted to R$ 659 million,comprising PGBL, VGBL and traditional plancontributions. This level was down from revenues ofR$ 922 million recorded in the previous quarter, due toseasonal effects on pension plans to take advantage oftax deductibility, which leads to increasedcontributions during the last months of the year and,as a result, higher technical reserves.Note: The insurance charts do not include Itauseg Saúde and Gralha Azul Saúde, and include the life insurance line of Itaú Vida e Previdência S.A.30 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Insurance, Pension Plan and CapitalizationThe pro forma net income of pension plan companiestotaled R$ 79 million, which is a 17.7% increase fromthe previous quarter. This change reflects the consistentgrowth in technical provisions, as well as loweradministrative expenses in the quarter as a result of theseasonal effect mentioned above.In order to provide its customers and investors with thehighest safety level within the limits set up by the lawand regulatory bodies, in the first quarter of the year,Itaú’s pension plan companies recorded additionalactuarial reserves of R$ 7 million, comprising provisionsfor insufficient contributions, financial fluctuations andrisk fluctuations. At the end of the fourth quarter of2004, technical provisions amounted to R$ 37 million.Pension Plan Technical Provisions6,13827626,98733547,67538278,5654438The table below shows the technical provisions byproduct and by guaranteed yield for participants.Technical Reserves by product/guarantee in03/31/2005R$ Million9,11348401960 2163 2300 2480 26061415 1471 1548 1647 166803/31/2004 06/30/2004 09/30/2004 12/31/2004 03/31/2005Traditional and OtherPGBLVGBLR$ MillionVGBL 4,840 - - 4,840 53.1%PGBL 2,606 - - 2,606 28.6%TRADITIONAL - 1,557 82 - 1,638 18.0%DEFINED BENEFIT - - 26 26 0.3%ACCESSORIES - - - 3 3 0.0%At the end of the first quarter of 2005, technical reservestotaled R$ 9.1 billion, up 6.4% from the previous quarter.As of March 31, 2005, VGBL products accounted for53.1% of the total pension plan technical provisions,while PGBL technical reserves represented 28.6% of thistotal.Offering the customer greater transparency than theformer pension plan products with a definedcontribution or a defined benefit, VGBL and PGBL hadtheir resources invested in exclusive funds during theaccumulation phase, and do not constitute a risk forthe company, which merely passes on the yieldachieved in the fund.The traditional plans, which have ceased to bemarketed by Itaú, offered the customer the guaranteeof a minimum yield, tied to an index (IGP-M or TR). Atthe end of the first quarter of 2005, their share in thetechnical provisions was 18.3%.Law 11,053/04, recently enacted with a view tofostering long-term savings, provides for the creationof pension plans, as from 2005, that are subject totaxation at rates that decrease with time, starting offwith a rate of 35% for withdrawals carried out in a periodof accumulation of up to 2 years, falling to a rate of 10%for withdrawals where the period of accumulation isover 10 years.Effective January 2005, products under the new taxsystem are available at Itaú branches.CapitalizationRevenues from capitalization bonds amounted to R$194 million in the first quarter of 2005, which is belowthe R$ 235 million revenue achieved in the previousquarter. The decrease is mainly attributable to the salesof the Super PIC Natal 2004 product, with a one timecontribution of R$ 1,000.00.During January and February 2005, the PIC Verãocampaign was held. This product is a capitalizationbond with monthly payments of R$60.00. More than160 thousand bonds were marketed in the campaign,helping the portfolio reach 3.7 million active bonds,compared to R$ 1,033 million in technical provisions.In the last 12 months, cash prizes amounting to R$ 32million were distributed to 865 customers whose bondswere selected.The following table shows the performance of theportfolio of capitalization bonds with monthly (PIC) andsingle (Super PIC) payments.Number of capitalization bonds3,860Super PIC3,770PIC3,6863,596390 396 398 413In Thousand3,7333469 3374 3289 3182 332403/31/2004 06/30/2004 09/30/2004 12/31/2004 03/31/200540931 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Investment Funds and Managed PortfolioThe pro forma financial statements below were based on Itaú internal management information, and are intendedto show the performance of the Investment Fund <strong>Management</strong> area.R$ MillionMutual Fund <strong>Management</strong> Fees (*) 349 323 26Brokerage Services 36 31 5Custody Services and Managed Portfolios 11 11 0Income Tax and Social Contribution (36) (24) (12)Profit Sharing (9) (7) (2)(*) Not including income from Pension Plans Funds <strong>Management</strong>.Obs:The Non Interested Expenses are made up of personnel expenses, other administrative expenses, other operating expenses , and the part of tax expenses associated with CPMF and others.Income from Investment Funds and Managed Portfoliosreached R$61 million in the first quarter of 2005, a R$23million increase compared to the previous quarter.The main factors responsible for this 59% increase inthe Income from Investment Funds and ManagedPortfolios were the R$26 million growth in mutual fundmanagement fees, due to the 5.5% increase in thevolume of funds under management, along with thechange in interest rates, and the R$13 million reductionin non interest expenses, as a result of lower expenseswith marketing investment in funds during the quarter.The volume of funds under Itaús management reachedR$105,197 million at the end of March 2005, comparedto R$99,753 million in December 2004, which representsa market share of 14.5% and 14.2% in March 2005 andDecember 2004, respectively.Itaú CorretoraIn the first quarter of 2005, the volume traded by ItaúCorretora, which is managed independently from theinvestment fund activities, amounted to R$16.6 billion,representing an 84% increase over the previous quarter,against the 34% growth of the market. Itaú CorretoraInvestment Funds – By Business AreaMar.05Dec.04Assets Under <strong>Management</strong>63.068.1Sep.0472.881.187.1R$ BillionMar.03 Jun.03 Sep.03 Dec.03 Mar.04 Jun.04 Sep.04 Dec.04 Mar.05Investment Fundsranked second among all brokers, with an 8% marketshare.On the BM&F, Itaú Corretora traded R$4.9 billion duringthe quarter, taking it up from 7th place in 2004 to 4thplace in 2005.Using its Home Broker (www.itautrade.com.br) in thefirst quarter of 2005, Itaú Corretora traded a volume ofR$1.0 billion on behalf of its customers, with a marketshare of 10.7% and ranking third amongst home brokersin Brazil. At the end of the first quarter, Itautrade hadover 41 thousand customers and produced an averageof 1.8 thousand transactions per day.89.693.8Managed Portfolios99.832 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Itaú BBAWe set out below the pro forma income statement of Itaú BBA.R$ MillionProvision for Loan and Lease Losses (22) 27 (49)Credits Recoveries and Renegotiated 89 4 85Banking Service Fees 80 84 (4)Non-Interest Expenses (130) (159) 28Taxes Expenses for ISS, PIS and COFINS (23) (30) 7Other Operating Income 15 16 (1)Non-Operating Income 0 1 (0)Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.The first quarter of 2005 showed a financial margin ofR$370 million, which reflects a decrease of 20.4% inrelation to the margin of R$464 million seen in theprevious quarter. This fact is basically due to (i) themanagement of the foreign exchange risk on theinvestments abroad, the result of which is partly offsetby the tax effect of the hedge transactions, and (ii) tothe decrease in the gains arising from structured creditoperations and transactions with derivatives.The results from doubtful debts showed an income ofR$67 million in the quarter, basically resulting from therenegotiation of loans previously written off as a loss,in the amount of R$80 million.In this context, the gross income from financialintermediation, in the amount of R$437 million, showeda decrease of 11.8% in relation to the previous quarter.Service fee income totaled R$80 million in the quarter,which is consistent with the previous quarter, andoriginated mainly from (i) cash management services,and (ii) commissions received for Itaú BBA'sparticipation in the fixed and variable income capitalmarket.The R$130 million of expenses not derived from interestshowed a decrease of 17.9%, when compared with theprevious quarter. This change is mainly the result ofsetting up provisions for contingent liabilities that tookplace in the fourth quarter of 2004, which were notexperienced in the first quarter of 2005.Expenses relating to income tax and socialcontribution, in the amount of R$103 million in the firstquarter of 2005, showed a reduction of 32.0%, whencompared with the previous quarter. This decreasewas basically the result of the tax effects of the foreigncurrency derivative transactions that are used to hedgethe Company's investments abroad.As a consequence of the items described above, ItaúBBA's pro forma net income amounted to R$257 millionin the first quarter of 2005, which is a 6.6% increase inrelation to the previous quarter. This increasecontributed towards an annualized return on allocatedcapital (tier 1) of 35.8% in the quarter.33 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
ItaucredThe following tables are based on the pro forma financial statements of Itaucred, using internally generatedinformation, intended to reflect the activity of the business units more accurately.R$ MillionProvision for Loan and Lease Losses (88) (66) (4) (157)Credits Recoveries and Renegotiated 27 10 1 38Banking Service Fees 70 100 1 172Partial Result of Insurance, Capitalization and Pension Plans - - - -Non-Interest Expenses (108) (157) (23) (288)Taxes Expenses for ISS, PIS and COFINS (19) (14) (1) (34)Equity in Income (Losses) of Unconsolidated Investments - - - -Other Operating Income 3 11 (0) 14Non-Operating Income - (2) (0) (2)R$ MillionProvision for Loan and Lease Losses (61) (44) 9 (97)Credits Recoveries and Renegotiated 43 12 0 56Banking Service Fees 67 81 1 148Partial Result of Insurance, Capitalization and Pension Plans - - - -Non-Interest Expenses (94) (166) (13) (273)Taxes Expenses for ISS, PIS and COFINS (13) (20) (0) (33)Equity in Income (Losses) of Unconsolidated Investments - - - -Other Operating Income 0 8 - 8Non-Operating Income 0 (0) - (0)Note: The item Non-Interest Expenses is composed by Personnel Expenses, Other Administrative Expenses, tax expenses for CPMF e Other taxes and Other Operating Expenses.34 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
ItaucredVehiclesThe Vehicle segment of Itaucred posted a net incomeof R$ 74 million in the first quarter of 2005, which is inline with the previous quarter results.The R$ 72 million increase in the financial margin in thequarter was due to the growth by R$ 1,109 million inthe loan portfolio balance.The provision for doubtful loan expenses reached R$ 88million in the first quarter of 2005, corresponding to aR$ 27 million increase from the previous quarter. Thisincrease is attributable to the portfolio growth, as wellas to changes introduced in the customers' risk ratings.It should be pointed out that Itaú has achieved asignificant positioning in the vehicle financing segment,with a market share of 17%.With its interest in Credicard, Itaú is the leader in thecredit card market in Brazil, with a 20.7% market share.Market Share (%)16.9% 16.9% 17.2%4.7% 4.7% 4.8% 4.8%6.8% 6.6%12.2% 12.1% 12.4% 13.0% 13.5% 14.1%Dec/03 Mar/04 Jun/04 Sep/04 Dec/04 Mar/05Itaucard17.8%Credicard20.3%20.7%Credit Cards - Non-Account HoldersThe Credit Card - Non-Account Holders segment postednet income of R$ 56 million in the first quarter of 2005,growing by 92.5% compared to the previous quarter.The financial margin increased due to the higher volumeof financing, which also impacted the provision fordoubtful loans and, as a consequence, higher provisions.Additionally, the provision balance in excess of theminimum required was increased by R$ 17 million.Service revenues expanded because of the increasedshareholding in Credicard in the fourth quarter of 2004,as mentioned above. Non interest expenses declinedbasically because of banner-related commissions,reward program and legal fees, in spite of the effect ofthe increased shareholding.The proportional card base went from 3,596 thousandin December 2004 to 3,548 thousand in March 2005,which equivocates to a 1.3% reduction in the first quarterof 2005.Quantity of Credit Cards8,0262,2458,2592,3088,6742,4139,0772,43810,6803,596(in thousand)11,0663,548The proportional volume of transactions in the periodamounted to R$ 2.3 billion, dropping by 3.5% from theprevious quarter.Volume of TransactionsTaií1,4301,254 1,391 1,4772,397 2,314R$ Millinn4th Q./03 1st Q./04 2nd Q./04 3rd Q./04 4th Q./04 1st Q./05Taií, Itaú's brand intended to offer credit products tolow-income consumers, is part of the bank's strategyto develop new revenue sources which, in the future,will help the institution's sustainability.Taií currently owns 52 stores and a loan portfolio of R$880 million, including consigned credits. It is expectedthat the number of stores will increase to 150 by theend of 2005.5,780 5,951 6,261 6,639 7,085 7,518Dec/03 Mar/04 Jun/04 Sep/04 Dec/04 Mar/05ItaucardCredicard35 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Balance SheetBalance by CurrencyCurrencyBalaBalanceBalance byCurrency36 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
<strong>Analysis</strong> of the Consolidated Balance SheetBalance by Currency (*)The Balance Sheet by Currencies shows the balanceslinked to the local and foreign currencies. At March 31,2005, the net foreign exchange position, includinginvestments abroad and disregarding the portion ofminority interests, was a total liability of US$ 1,349million. It should be pointed out that the Company'sGap <strong>Management</strong> Policy considers the tax effects ofthe net foreign exchange position. Since the result ofexchange rate variation on Investments Abroad is nottaxed, the instrument is considered a hedge (a liabilityin currency derivatives) recorded at a greater value thanthe protected asset. The results of the foreign currencyexposure, net of tax effects, is very low and, therefore, isconsistent with the strategy for low exposure to riskadopted by Banco Itaú Holding Financeira S.A.R$ MillionForeign Exchange Portfolio 13,417 13,418 5,287 8,131 0Others 28,580 26,683 26,539 144 2,534Investments in 842 7,169 270 6,900 577Fixed Assets 1,926 1,858 1,858 0 68Deferred Expenses 230 191 191 0 39Futures 4,348Options 2,769Swaps 4,493Others 7516,264976,909002,9243,1684,254215Demand Deposits 10,488 9,521 9,509 12 975Savings Accounts 19,024 18,765 18,765 0 258Interbank Deposits 1,055 458 458 0 646Time Deposits 13,277 7,978 7,978 0 5,307181 181 181 0 01130000Foreign Exchange Portfolio 13,567 13,572 6,861 6,711 0Others 27,789 23,420 21,682 1,738 5,4164,7491,692Capital and Reserves 13,487 13,487 13,487 0 6,661Net Income 1,141 1,141 1,141 0 23900Futures 9,270Options 3,339Swaps 6,754Others 4496,8564,1486,065506(*) It does not exclude transactions between local and foreign business.37 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Risk <strong>Management</strong>Risk <strong>Management</strong>RiskManage<strong>Management</strong>RiskRisk Man38 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Risk <strong>Management</strong>Market RiskMarket risk management at Itaú uses three concepts:value at risk (VaR), stress scenarios, and stop loss.Banco Itaú Holding FinanceiraBanco Itaú views risk management as a key tool tooptimize the utilization of capital and the selection ofthe best business opportunities, in order to ensure thebest risk/return ratio for its shareholders.This quarter we incorporated the IGPM risk factor, whichaffects the assets and liabilities of the supplementarypension fund entities, in accordance with the rules ofSUSEP (Circ. 272).The global VaR of Banco Itaú Holding Financeira showsa significant diversification of the risks of the businessunits, which enables the conglomerate to carry a verysmall total exposure to market risk when compared toits capital.Banco Itaú Holding VaR *R$ MillionFixed Rate Risk Factor 14.7 18.3Benchmark Rate (TR) Risk Factor 13.5 15.6IGPM Risk Factor 34.2 31.5Exchange Indexation Risk Factor 10.9 8.6Exchange Variaton Risk Factor (**) 51.6 34.0Sovereign Risk Factor 15.0 15.5Equities Risk Factor 18.1 17.5Libor Risk Factor 0.2 0.2Banco Itaú Europa 0.9 0.6Banco Itaú Buen Ayre 0.2 0.2Diversification Impact (84.6) (88.5)(*) VaR refers to the maximum potencial loss of 1 day, with a 99% confidence level.(**) Considering the tax effects, the Exchange Variation Risk Factor VaR would be of R$ 11.9million and the Global VaR would be of R$ 41.1 million in 03/31/05 and of R$ 15.6 millionand of R$ 40.7 million, respectively, in 12/31/04.Banco ItaúThe Global VaR of the structural gap showed anincrease, due mainly to the increase in the volatility ofexchange rate variation, which was partially offset bythe reduction in the risk of the fixed rate portfolio.We can, however, see that the levels of the Global VaRcontinue to be immaterial, in respect to the institution'sassets.Structural Gap Itaú VaR *R$ MillionMar 31, 05 Dec 31, 04Fixed Rate Risk Factor 7.5 17.7Benchmark Rate (TR) Risk Factor 13.5 15.6IGPM Risk Factor 34.8 30.9Exchange Indexation Risk Factor 7.8 7.4Exchange Variaton Risk Factor (**) 57.2 32.3Equities Risk Factor 17.5 12.3Diversification Impact (63.5) (69.7)Global VaR (**) 74.9 46.7(**) Considering the tax effects, the Exchange Variation Risk Factor VaR would be of R$ 2.6 millionand the Global VaR would be of R$ 39.7 million in 03/31/05 and of R$ 14.4 million and of R$39.0 million, respectively, in 12/31/04.This quarter, the use of the VaR Stress limit by Itaú'sOwn Portfolio Trading Desk was 19.1% (R$27.5 million)on average. On March 31, 2005, this percentage was29.8% (R$43 million). In this period, the maintransactions were in the Fixed Rate, ExchangeIndexation, Exchange Variation and Sovereign Debtmarkets.The asset portfolio of the branches in Grand Cayman,New York and Itaú Bank showed an increase in theglobal Overseas risk, due to the increase in the volatilityof the secondary market for securities traded abroad,coupled with the swings in the Brazil country risk.Overseas VaR *US$ MillionSovereign Risk Factor 7.8 5.3Libor Risk Factor 0.1 0.1Diversification Impact (0.1) (0.6)Maximum Global VaR in the quarterMedium Global VaR in the quarterMinimum Global VaR in the quarterBanco Itaú BBAThe first quarter of 2005 was marked by the diversity inthe behavior of the main financial variables. In thisenvironment, Itaú BBA's Treasury exploited thediversification effect of its portfolios, ensuring that theprofile of market risk shown in previous periods wasmaintained.This similarity demonstrates the consistency in thevalues for Average and Minimum VaR in the period tothose of the immediately preceding period, as shownin the table. The uncertainties of the market in the periodare reflected in the discrete nominal increase of theMaximum VaR in the quarter. Itaú BBA's VaR remainedat negligible levels when compared to the institution'sassets.Banco Itaú BBA VaR *R$ MillionFixed Rate Risk Factor 10.8 2.6Exchange Indexation Risk Factor 0.7 1.7Exchange Variaton Risk Factor 19.5 16.0Equities Risk Factor 0.8 3.2Sovereign Risk Factor 4.2 4.5Diversification Impact (9.7) (8.8)Maximum Global VaR in the quarterMedium Global VaR in the quarterMinimum Global VaR in the quarter39 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Risk <strong>Management</strong>Securities PortfolioEvolution of Securities PortfolioR$ MillionPublic Securities - Domestic 7,218 24.3% 7,486 25.7% 12,939 44.9% -3.6% -44.2%Public Securities - Foreign 852 2.9% 1,065 3.7% 902 3.1% -20.0% -5.6%Total Public Securities 8,070 27.1% 8,551 29.3% 13,841 48.1% -5.6% -41.7%Private Securities 11,660 39.2% 12,145 41.6% 9,526 33.1% -4.0% 22.4%PGBL/VGBL Funds Quotas 7,436 25.0% 6,918 23.7% 4,716 16.4% 7.5% 57.7%Derivative Financial Instruments 2,984 10.0% 1,962 6.7% 1,263 4.4% 52.1% 136.2%Additional Provision (400) -1.3% (400) -1.4% (545) -1.9% 0.0% -26.6%The balance of Itaú's securities portfolio showed anincrease of 2.0% in relation to the previous quarter,reaching R$29,750 million at March 31, 2005. In thisquarter, there was an increase in the relative share ofderivative financial instruments in the portfolio from6.7% in the fourth quarter of 2004 to 10.0% in the firstquarter of 2005. The share of public securities in theportfolio reached 27.2%, which represents a reductionfrom the 29.3% share experienced in the previousquarter.Itaú continues to make an important contributiontowards the country's current cycle of growth, throughthe acquisition of Brazilian companies' securities.Accordingly, at March 31, 2005, private securitiesrepresented 39.1% of the total balance of the portfolio.There was an increase in the balance of quotas of PGBL/VGBL funds, which reached R$7,436 million; this isequivalent to growth of 7.5% in relation to the lastquarter of 2004. It should be remembered that thesecurity portfolios of the PGBL/VGBL plans belong tothe customers, with a balancing entry included inliabilities under the heading "Technical Pension PlanProvisions".Private Securities Portfolio and Credit PortfolioAt March 31, 2005, the total balance of funds allocatedfor the financing of various economic agents reachedR$68,646 million, which is an increase of R$3,225 million,when compared with the balance of the fourth quarterof 2004.Funds intended for the economic agentsR$ MillionEuro Bond’s and Similars 3,734 552 194 51 41 4,573Certificates of Deposits 3,344 154 1 10 1 3,510Debentures 273 538 254 51 3 1,119Shares 122 333 128 5 0 589Promissory Notes 194 353 277 133 - 957Other 196 255 438 24 0 913Credit Operations (*) 9,121 26,575 13,693 2,256 5,367 57,012(*) Endorsements and Sureties included.40 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Risk <strong>Management</strong>Credit RiskCredit OperationsThe strong demand for credit and specific actions aimedat making available credit in given segments has madeit possible for Itaú to remarkably expand its loan andfinance portfolio. At March 31, 2005, the credit portfolioadded up to R$57,012 million, including avals and lettersof guarantee, which is equivalent to a 7.0% growthcompared to the balance of the previous quarter. Asignificant portion of the increase was in consumercredit. This quarter, the Bank maintained its credit policy,which values the quality of the portfolio and the questfor the best risk/return ratio in its transactions.At the end of March, the volume of credit linked toforeign currency corresponded to 20.5% of the totalportfolio. The share of customers with a credit riskbetween levels "AA" and "B", which are consideredbetter quality, remained stable in relation to December2004 and accounted for 86.6% of the total portfolio.Risk was well spread out among the various lines ofbusiness, in such a way that no single line of businessconcentrated more than 5.2% of the total risk. In thequarter, the most significant growth occurred in theServices Other segment, which experienced a positivevariation of R$312 million. Other segments alsoexperienced growth, including, Light and HeavyVehicles, with an increase of R$252 million, TVCommunication, with a rise of R$238 million, and RetailTrade, which grew R$232 million.The 100 largest debtors accounted for 28.0% of the totalportfolio, which is a positive change in relation to the28.9% share held in December 2004. The change isassociated essentially with the change in the portfolio'smix.Credit OperationsR$ Million (**)57,01253,2756,3666,32811,7987,35311,5727,09044,58145,41450,98034,28247,40738,65927,25338,41919,59629,61516,91612,20623,6749,05716,89014,0584,63410,8185,654 8,022 3,95882 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 *Credit Operations and Guarantees (2)Credit Operations (1)(*) At March 31, 2005.(**) In constant currency from December 31, 1995 to that date; in nominal amounts thereafter.(1) Credit transactions: Loans, Leasing, Other Credits and Advances on Foreign Exchange Contracts. (2) Guarantees include collateral, surety and other guarantees.41 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Risk <strong>Management</strong>Credit Portfolio Development Consolidated by Client Type and CurrencyR$ MillionCredit Card 5,009 5,116 2,959 (107) -2.1% 2,050 69.3%Personal Loans 8,343 6,845 5,071 1,499 21.9% 3,272 64.5%Vehicles 7,270 6,196 4,665 1,074 17.3% 2,605 55.8%Corporate 12,630 11,614 11,385 1,016 8.7% 1,245 10.9%Itaú BBA 12,303 11,407 10,270 896 7.9% 2,033 19.8%Itaú (*) 326 207 1,115 120 58.0% (789) -70.7%Small and Medium-Sized Companies 7,735 7,419 4,854 316 4.3% 2,881 59.4%Rural Loans 2,474 2,640 1,735 (165) -6.3% 739 42.6%Mortgage Loans 1,872 1,893 1,988 (21) -1.1% (116) -5.8%Credit Card 25 34 - (10) -28.0% 25 -Personal Loans 123 82 75 42 50.8% 49 65.1%Vehicles - - - -Corporate 10,224 10,282 11,220 (58) -0.6% (996) -8.9%Itaú BBA 8,358 8,677 9,792 (319) -3.7% (1,434) -14.6%Itaú (*) 1,866 1,605 1,428 261 16.3% 438 30.7%Small and Medium-Sized Companies 1,302 1,152 796 150 13.0% 506 63.6%Rural Loans - - - -Mortgage Loans 5 4 9 1 29.9% (4) -44.2%Credit Card 5,033 5,150 2,959 (117) -2.3% 2,075 70.1%Personal Loans 8,467 6,926 5,146 1,540 22.2% 3,321 64.5%Vehicles 7,270 6,196 4,665 1,074 17.3% 2,605 55.8%Corporate 22,854 21,896 22,605 958 4.4% 249 1.1%Itaú BBA 20,661 20,084 20,062 577 2.9% 599 3.0%Itaú (*) 2,193 1,812 2,544 381 21.0% (351) -13.8%Small and Medium-Sized Companies 9,037 8,571 5,650 466 5.4% 3,387 60.0%Rural Loans 2,474 2,640 1,735 (165) -6.3% 739 42.6%Mortgage Loans 1,877 1,897 1,997 (20) -1.0% (120) -6.0%(*) Includes large companies operations accounted on Banco Itaú.Note: Endorsements and sureties included.42 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Risk <strong>Management</strong>Loans Portfolio by risk factorFixed Rate 4.3% 42.3% 12.8% 14.6% 15.8% 10.1% 100.0%Floating Rate 1.0% 18.9% 10.2% 13.8% 18.2% 38.0% 100.0%Prices Index 0.9% 6.8% 11.7% 3.9% 4.6% 72.1% 100.0%Other 3.2% 56.0% 8.5% 6.9% 8.7% 16.6% 100.0%Risk Rate of the Credit PortfolioR$ MillionIndividualsAA - C 18,256 153 0.8% 7.2% 16,488 139 0.8% 6.8% 11,504 106 0.9% 5.0%D - H 4,393 1,466 33.4% 68.5% 3,693 1,345 36.4% 65.5% 3,493 1,264 36.2% 60.1%BusinessesAA - C 27,397 165 0.6% 7.7% 26,264 163 0.6% 7.9% 22,771 144 0.6% 6.9%D - H 933 354 37.9% 16.6% 963 407 42.3% 19.8% 1,103 589 53.4% 28.0%Additional Provision 1,150 2.3% 1,000 2.1% 1,000 2.6%DepositsAt March 31, 2005, the total balance of deposits reachedR$44,025 million, growing 4.8% in the quarter. Onceagain, the increase in term deposit funding should beDeposits Balancehighlighted, which was R$2,248 million. Itaú's broaddeposit base has been guaranteeing the funding forthe consistent growth of its operations.R$ MillionDemand deposits 10,669 24.2% 11,156 26.5% 8,798 25.4% -4.4% 21.3%Savings deposits 19,024 43.2% 19,197 45.7% 17,530 50.7% -0.9% 8.5%Interbank deposits 1,055 2.4% 647 1.5% 451 1.3% 63.1% 134.3%Time deposits 13,277 30.2% 11,029 26.2% 7,828 22.6% 20.4% 69.6%Liquidity RiskIn the first quarter of 2005, suitable liquidity levels weremaintained in Brazil and abroad thanks to the solid anddiversified bases for funding, both in the interbankmarket and with customers, and to the resizing of thesecurities portfolio that took place in the period.Operating RiskItaú's operational risks are analyzed from twoperspectives: management and control. Themanagement of operational risks is concerned withacting on the causes of the risk by means of mappingprocesses, identifying threats, drawing up action plans,defining policies and procedures, rationalizing andimproving processes and drawing up and monitoringindicators for self-assessment.The control of operational risks takes place byidentifying operational risk events, standardizinginformation, quantitative modeling, statistical analysisand measuring the losses, as well as by setting upprovisions for expected losses and allocating capitalfor unexpected losses.43 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Activities AbroadctivitiesAbroadAcAbroadActivities44 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Activities AbroadActivities AbroadBanco Itaú Holding Financeira S.A. occupies a prominentplace amongst the economic groups with private capitaland a presence abroad, through its units in New York,Grand Cayman Island, Nassau, South America, Europe andJapan. In Japan, the Company increased its presence withthe conversion of its representative office in Tokyo into abranch, with the opening of a trading room and, morerecently, during the first quarter of 2005, Banco Itaú BBAS.A. obtained from the Chinese authorities permission tostart operations at its representative office in Shanghai.Taking advantage of this strategic international presence,Banco Itaú Holding Financeira S.A. has been working toachieve an important synergy bewteen its units abroadand in Brazil by financing foreign trade and issuingHighlights - Units AbroadEurobonds that are supported by the integration of itstreasury, capital market and private banking business(Banco Itaú Europa Luxemburgo).The consolidated investments abroad of Banco ItaúHolding Financeira S.A. at March 31, 2005 totaled R$6,900million (US$2,588 million), including non-financial business.During the first quarter of 2005, Banco Itaú S.A. enteredinto agreements with Banco BPI of Portugal, "la Caixa" ofSpain and Unicrédito of Italy for the transfer of funds, withhopes to gain a significant and growing share in theinternational market for the transfers of funds by individuals;these partnerships arein addition to the partnership withMoneygram and to the opening of the Tokyo branch, bothof which occurred in 2004.R$ MillionAssets 8,624 7,648 During the fourth quarter of 2004, there was more incomeStockholder's Equity 2,094 2,081 from realizing the appreciation of the securities portfolioIncome accumulated in the Financial Year 19 144Income in the Quarter 19 135<strong>Quarterly</strong> annualized ROA 0.9% 7.3%<strong>Quarterly</strong> annualized ROE 3.8% 28.7%Assets 3,041 2,798 During the fourth quarter of 2004, there was more incomeStockholder's Equity 1,445 1,437 from realizing the appreciation of the securities portfolioIncome accumulated in the Financial Year 7 127Income in the Quarter 7 43<strong>Quarterly</strong> annualized ROA 0.9% 6.3%<strong>Quarterly</strong> annualized ROE 1.9% 12.5%Assets 1,527 1,462Stockholder's Equity 261 253Income accumulated in the Financial Year 2 6Income in the Quarter 2 5<strong>Quarterly</strong> annualized ROA 0.6% 1.5%<strong>Quarterly</strong> annualized ROE 3.6% 8.9%Lower results with credit operationsAssets 8,829 8,906 Higher results with a reversal of the provision for country riskStockholder's Equity 1,325 1,436 booked in Banco Itaú Europa Luxemburgo and higher resultsIncome accumulated in the Financial Year 70 66 with Equity in the Earnings of Associated Companies fromIncome in the Quarter 70 11 the investment in BPI<strong>Quarterly</strong> annualized ROA 3.2% 0.5%<strong>Quarterly</strong> annualized ROE 23.0% 3.0%Assets 10,973 9,039Stockholder's Equity 1,800 1,764Income accumulated in the Financial Year 69 117Income in the Quarter 69 13<strong>Quarterly</strong> annualized ROA 2.6% 0.6%<strong>Quarterly</strong> annualized ROE 16.3% 3.1%Higher results from Treasury operations(1) BBA-Creditanstalt Bank Ltd., Banco Itaú-BBA S.A. - Nassau Branch, BBA Representaciones S.A., Banco BBA-Creditanstalt S.A. - Sucursal Uruguai, Nevada Woods S.A., Karen International Ltd., MundostarS.A., AKBAR - Marketing e Serviços Ltda., BBA Overseas Ltd and BBA Icatu Securities, INC.45 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Activities AbroadTrade Lines RaisingBanco Itaú-BBA, through funding with trade lines, along with their banking relationships, have been able to maintain agreat power with regards to penetration and diversification as it relates to the origin of the funds, which guarantees asubstantial increase in supply, an increase in terms, and a record level reduction in the funding cost.Trade Line DistributionEurope 48%United States 33%Latin America 10%Canada 3%Japan / Australia 7%Other 0%Performance of Over-Libor spread on trade lines (%p.a.)At:Due To:180 days 360 daysSep 30, 04 0.350% 0.475%Dec 31, 04 0.250% 0.350%Mar 31, 05 0.200% 0.300%Main Issues Outstanding (1)We highlight below the main financial issues outstanding in the first quarter of 2005.InstrumentCoordinatorBalance at Issues AmortizationsDec 31, 04 in the Quarter in the QuarterFixed Rate Notes (2) Merrill Lynch 291Fixed Rate Notes Merrill Lynch e Itaubank 100Fixed Rate Notes Merrill Lynch e Itaubank 80Fixed Rate Notes Dresdner Kleinwort 100Fixed Rate Notes Merrill Lynch 105Fixed Rate Notes ABN Amro Bank e Itaubank 125Floating Rate Notes (3) HypoVereinsbank e Hamburgische Landesbank GZ 150 (150)Floating Rate Notes Bank of America 210 (40)Floating Rate Notes Bank of America 150 (50)Floating Rate Notes Nomura 150 (5)Floating Rate Notes (4) Banca IMI e Royal Bank of Scotland 205Floating Rate Notes Itaubank 393Floating Rate Notes (5) Itaú Europa, HypoVereinsbank e ING Luxembourg 273Floating Rate Notes Merrill Lynch 105Medium Term Notes Itaubank, Itaú Europa e Standart Bank London 100Other Notes (8) 191 149 (6)Total 2,602 274 (251)(1) Amounts refer to principal amounts.(2) Amount in US$ equivalent to JPY 30 billion(3), (4) and (5) Amounts in US$ equivalent to E$ 125 million, E$ 150 million and E$ 200 million, respectively(6) 180-day Libor(7) 90-day Euribor(8) Structured and Credit Linked NotesBalance atMar 31 ,05Issue Date Maturity DateUS$ MillionCoupon %279 08/13/2001 08/15/2011 4.250%100 08/13/2001 08/15/2011 10.000%80 11/09/2001 08/15/2011 10.000%100 04/05/2002 04/05/2005 6.750%105 11/25/2003 09/20/2010 5.010%125 01/31/2005 01/31/2008 4.375%03/14/2002 03/14/2005 Euribor (7) + 0,55%170 03/20/2002 03/20/2007 Libor (6) + 0,70%100 07/19/2002 03/20/2006 Libor (6) + 0,65%145 07/23/2003 09/20/2008 Libor (6) + 0,63%195 07/24/2003 07/24/2006 Euribor (7) + 0,55%393 12/31/2002 03/30/2015 Libor (6) + 1,25%260 06/25/2004 07/12/2007 Euribor (7) + 0,45%105 07/07/2004 03/20/2011 Libor (6) + 0,65%100 07/28/2003 07/28/2005 4.75%3342,59146 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Ownership StructureOwnership StructureOwnershipStructureOwnershipStructureOwnership47 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Ownership StructureOwnership StructureItaú manages its corporate structure in a way thatmakes the best use of its capital amongst the variousoperating segments of the company. This strategyreduces possible inefficiencies associated with theorganization of the participating interests in thecompanies. For this quarter, Itaú shows the abridgedorganization chart of the Itaú structure with alterationsthat reflect the conglomerate's new areas of activity.Outstanding Preferred Shares (in thousand) 53,077 52,647 53,397,597Outstanding Common Shares (in thousand) 60,599 60,624 60,689,313Preferred Shares in Treasury (in thousand) 1,820 2,251 1,500,191Common Shares in Treasury (in thousand) 88 63 662,522NB: On 10/20/04, a reverse split of shares was carried out.On March 31, 2004, the preferred stock in treasury was75.1% of the total options not yet exercised bymanagement. Note 16 of the Financial Statementsgives details of the average cost of acquiring the sharesin treasury, as well as the movement in the optionsgranted to the conglomerate's executives under the"Plan for Granting Stock Options".Família E.S.A60.15% Common Shares32.92% TOTALFree Float39.85% Common Shares83.36% Preferred SharesItaúsa87.87% Common Shares46.84% TOTALFree Float12.13% Common Shares99.99% Preferred SharesBanco ItaúHoldingFinanceira S.A.89.62% Common Shares89.62% TOTAL100.00% Common Shares100.00% TOTALBanco ItaúBanco Itaú BBA50.00% Common Shares95.75% TOTALBanco ItaúEuropa19.53% Common Shares19.53% TOTALItaú Corretorade Valores99.99% Common Shares99.99% TOTALOrbitall99.99% Common Shares99.99% TOTALItaucardFinanceira99.99% Common Shares99.99% TOTALItaú Banco deInvestimento99.99% Common Shares99.99% TOTALItaú Bank100.00% Common Shares100.00% TOTALBanco ItaúBuen Ayre100.00% Common Shares100.00% TOTALCia. Itauleasing99.99% Common Shares99.99% TOTALCredicard50.00% Common Shares50.00% TOTALBanco Fiat99.99% Common Shares99.99% TOTALBanco Itaucred99.99% Common Shares99.99% TOTALFinanceiraItaú CBD50.00% Common Shares50.00% TOTALItaúCapitalizaçãoItaú SegurosItaú Vida ePrevidência99.99% Common Shares99.99% TOTAL100.00% Common Shares100.00% TOTAL100.00% Common Shares100.00% TOTALNote: The percentage above refers to the total of direct and indirect participation.48 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Performance in the Stock MarketPerformance in the Stock MarketformancePerStockarketStockMarke49 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
Performance in the Stock MarketIn the 1st quarter of 2005, Itaú Holding's preferred stock (ITAU4)was quoted at R$435.00 per share, with an appreciation of60.9% in relation to the 1st quarter of the previous year. Itscommon stock (ITAU3) appreciated 68.9% over the 1st quarterof 2004, with a quotation of R$422 per share. Itaú Holding's(ITU) ADRs, which are trade on the NYSE, closed in the 1stquarter of 2005 with an appreciation of 73.5%; they werequoted at US$81.15 per ADR.Market capitalization reached R$51.8 billion, which maintainedItaú Holding as the largest bank in Latin America, in terms ofmarket value.Performance in the Stock Market (*)Maximum in 30 days 492.00Minimum in 30 days 421.54Variation (%) 16.7%Maximum in 52 weeks 492.00Minimum in 52 weeks 223.00Variation (%) 120.6%Price 435.00(*) Calculated on the basis of closing quotations.Payment/Provisioning of Interest on Own Capital(*)302176202427239Market Value on the Stock ExchangeFor over 20 years, Itaú has maintained the same dividend policy,with monthly dividend payments to its stockholders andcomplementary annual payments. Furthermore, in the last 14years, the Bank has not had a capital increase in cash and hasdistributed over R$ 7 billion in dividends to its stockholders.Important EventsIIn March 2005, Itaú was awarded, for the 2nd time, the 2004 ListedCompany Seal by ANIMEC (National Association of Capital MarketInvestors). This award, which is based on a direct election byANIMEC's associates, endorses our transparency and respect forthe minority stockholders. ANIMEC is a not for profit association,the main purpose of which is to represent the interests, anddefending the rights, of the investors not from the controllingblock (minority).In the same month, one of the most important international ratingagencies, Moody's, upgraded Banco Itaú´s financial strength ratingfrom C- to C, based on a stable outlook. According to the agency,this upgrade reflects Itaú´s consistently strong financial264R$R$ Million5141st Q/03 2nd Q/03 3rd Q/03 4th Q/03 1st Q/04 2nd Q/04 3rd Q/ 04 4th Q/04 1st Q/05(*) Gross of taxes.355Variation: 1st Q./04 – 1st Q./0545%346R$ Million51,838 44,092 30,453 18,116 19,582 21,297 17,834 6,786 6,275 4,978 3,160performance, a management that gives priority to lendingoperations to segments that show higher margins of return,consistent improvements in operating efficiency and Itaú´s solidand well-defended strategic position, including a strong marketshare, diversified product mix and less volatile assets. Of the 23banks that operate in Brazil, assessed by Moody's in this rating,Itaú is the best ranked, and is the only one to be given a C rating.Subsequent EventsOn April 27, 2005, the Ordinary and Extraordinary GeneralMeetings of Itaú Holding's Stockholders took place. As themain topics, we point out the approval of the Annual Report,the election of the members of the Board of Directors andFiscal Council and deliberation on the application of the netincome of the financial year, as well as the institution of theRemuneration Committee.In April, we experienced an additional rating upgrade. Thistime the rating upgrade came from the Fitch Ratings agency,which raised the individual ratings of Itaú Holding, BancoItaú and Banco Itaú BBA. This is the highest rating amongthe 46 banks assessed by Fitch Ratings in Brazil. Among thereasons for the upgrades in the classifications, Fitch Ratingshighlights Itaú´s long and consistent history of solid financialperformance, with a diversified and solid profitability, at levelsfar higher than those achieved by the local and regionalcompetitors. It also points out as the Bank's competitivedifferentials the quality of its capital, its significant presenceabroad, the change in the asset mix, giving priority to credit,and the conservative policy as to credit rating andprovisioning.Performance CultureThe higher market capitalization, the significant increasein the liquidity of its stock, and the launch of differentiatedproducts / services for the capital market, among otherinitiatives, reflect the enhancement of Itaú Holding'sPerformance Culture, which aims at creating value for ourstockholders and focuses on sustained profitability. As aresult of this strategic long term vision of the PerformanceCulture, in the last six years, the return on stockholders'equity has remained above 26%.ROE Annualized (%) - Evolution from 1994 to !st Quarterof 2005 (*)12.5 11.115.4 17.2 18.9 31.627.731.526.3 26.5 27.035.11994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1stQ./05(*) Annualized Return on Stockholders´ Equity.50 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
PricewaterhouseCoopersAv. Francisco Matarazzo, 1700Torre TorinoCaixa Postal 6100505001-400 São Paulo, SP - BrasilTelefone (0xx11) 3674-2000Report of Independent Accountants on Supplementary InformationTo the Board of Directors and Stockholders ofBanco Itaú Holding Financeira S.A.1. In connection with our limited review of the <strong>Quarterly</strong> Information of Banco Itaú Holding Financeira S.A. and itssubsidiaries (consolidated) as of March 31, 2005 and 2004, on which we issued a report without exceptions datedApril 25, 2005, we performed a review of the supplementary information included in <strong>Management</strong>'s Report on theConsolidated Operations of Banco Itaú Holding Financeira S.A. and its subsidiaries (consolidated).2. Our work was performed in accordance with specific rules set forth by the Institute of Independent Auditors ofBrazil (IBRACON), in conjunction with the Federal Accountancy Council, for the purpose of reviewing theaccounting information contained in the supplementary information of <strong>Management</strong>'s Report on the ConsolidatedOperations of Banco Itaú Holding Financeira S.A. and subsidiaries, and mainly comprised: (a) inquiry of, anddiscussion with, management responsible for the accounting, financial and operational areas of the Bank withregard to the main criteria adopted for the preparation of the accounting information presented in thesupplementary information and (b) a review of the significant information and of the subsequent events whichhave, or could have, significant effects on the financial position and operations of the Bank and its subsidiaries.The supplementary information included in <strong>Management</strong>'s Report on the Consolidated Operations is presentedto permit additional analysis. Notwithstanding, this information should not be considered an integral part of the<strong>Quarterly</strong> Information.3. On the basis of our review, we are not aware of any material modifications that should be made to thissupplementary information, in order for it to be adequately presented, in all material respects, in relation to the<strong>Quarterly</strong> Information taken as a whole.São Paulo, April 25, 2005PricewaterhouseCoopersAuditores IndependentesCRC 2SP000160/O-5Ricardo BaldinContadorCRC 1SP110374/O-0Emerson Laerte da SilvaContadorCRC 1SP171089/O-351 <strong>Management</strong> <strong>Discussion</strong> and <strong>Analysis</strong>Banco Itaú Holding Financeira S.A.
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